Analysis: Shutdown, default threat elevates appeal of U.S. Treasuries
By Richard Leong
NEW YORK (Reuters) - Government shutdown. Federal default. These looming political threats to the U.S. economy might scare investors to buy more U.S. Treasuries in the coming days as they seek a shelter for their cash.
While a protracted government shutdown, and particularly a default, could harm to the image of Uncle Sam's debt, its safe-haven appeal looks unchallenged in the short term.
Worried about rising chances that federal workers and contractors won't get paid if much of the government shuts down on October 1 amid a political standoff in Washington, investors are expected to go by the conventional crisis playbook - dumping assets perceived to be higher-risk and rushing into those seen as lower risk.
An extended shutdown, which would include furloughs and temporary unpaid leave for many government employees, would have a direct impact on businesses who rely on government contracts or spending by government employees. It could also lead to delays in spending on big-ticket items by companies and consumers as confidence takes a hit.
That could all harm economic growth and make it less likely that the Federal Reserve will curb its stimulus program through bond buying, further supporting prices of government debt.
Congress must also raise the federal borrowing authority by October 17 - when the government is expected to exhaust its $16.7 trillion debt limit.
Failure to do so could threaten a debt default but many analysts think the government would slash spending before declining to pay its creditors, leaving Treasuries relatively unscathed, at least initially.
Analysts said a risk-aversion move could push benchmark yields on 10-year notes below 2.50 percent, more than 0.50 of a percentage point below the two-year high above 3 percent set in early September. Late on Friday they were trading at about 2.63 percent. Continued...