Analysis: Washington gridlock may disrupt vital money markets

Fri Oct 4, 2013 5:31pm EDT
 
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By Richard Leong

NEW YORK (Reuters) - The fight over raising the U.S. debt ceiling is starting to rattle the money markets and could eventually disrupt the flow of cash needed for banks to lend and companies to invest.

As an impasse over the federal budget lengthens the first partial government shutdown in 17 years, there are increasing fears among investors that the White House and Congress won't reach an agreement to raise the $16.7 trillion debt limit by an October 17 deadline. That raises the risk of a first outright default in U.S. history.

Most analysts believe an outright default, in which the U.S. Treasury Department has no intention to fully pay back its debt obligations, is a remote possibility since it would wreak havoc on global financial markets and damage the long-term safe-haven status of U.S. debt and currency.

Even so, markets are starting to reflect the view that a short-term delay in payments is possible.

"The market is incorporating chances of a delay in payments," said Dave Sylvester, head of money markets at Minneapolis-based Wells Capital Management, which manages $131 billion in money market assets.

Traders are demanding higher interest rates against the chance that the Treasury could delay coupon and principal payments on specific securities.

Other money markets are showing no signs of panic. The overnight borrowing costs in the repurchasing market, which banks use to fund their operations, crept up this week but they were running below T-bill rates.

In the interbank lending market, the three-month London interbank offered rate - which is used to setting the interest rates on some $350 trillion of financial products - fell to a record low this week.   Continued...

 
A general view of the U.S. Capitol Dome in Washington, October 4, 2013. REUTERS/Jonathan Ernst