Markets Shrug Off US Government Dysfunction

BOND STRATEGIST: The buy-the-dip mentality is alive and well as portfolio managers are for the most part ignoring the political antics, trying their best to pretend it's not happening

Dave Sekera, CFA 8 October, 2013 | 7:01AM

The corporate credit market shrugged off the political rhetoric emanating from Washington last week. Corporate credit spreads traded in a narrow range last week, in a relatively directionless market. Spreads had tried to weaken at the beginning of the week but as soon as they started to move wider, traders snapped up those offerings and pushed credit spreads right back down again. 

The buy-the-dip mentality is alive and well as portfolio managers are for the most part ignoring the political antics, trying their best to pretend it's not happening. For all of the headlines proclaiming the potential for a default on government bonds after the Treasury reaches the debt ceiling, investors are not placing any probability on a payment default actually occurring. After having been to the brink several times over the past few years only to be saved by a last-minute resolution, investors have been conditioned like Pavlov's dogs to expect an 11th-hour agreement.

Regarding the economic impact of the government shutdown, Robert Johnson, Morningstar's director of economic analysis, wrote, "If they come to a settlement on the debt ceiling and budget issues in the next week or two (and include retroactive pay for government employees), the economy will do just fine." However, he cautions, "A month-long shutdown would likely cut GDP growth by at least 0.5% in a world of 2% growth." Considering the political impact and repercussions of the government shutdown that have already occurred, it appears that the congressional and executive branches will not be able to reach an agreement on a continuing resolution to fund operations in the near term. As such, it appears the most likely course of action will be to resolve both the budget and debt ceiling issues at the same time over the next two weeks.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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