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US Treasuries: Shutdown is business as usual

US politicians are always ahead of the curve and are unfolding the usual budget drama at breakneck speed. This week is about another showdown and another government shutdown may be on the agenda later – the return to the usual madness they call normality.

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Key take-aways

  • Friday marks the beginning of the new US fiscal year, but there is no budget agreed upon yet. The stronger the more progressive forces become in Congress, the faster yields will rise.
  • We maintain our call for short-dated, moderate credit risk or instruments offering active duration management for a challenging time to come.

On Friday 1 October, the new US fiscal year begins and Congress is once again risking a ‘shutdown’ if no last-minute deal can be struck. In the absence of such a deal, the lack of appropriated funds forces the government to shut down all non-essential operations, ranging from museums and national parks to tax offices, the environment protection agency, and customs office, depending on the interpretation. However, government shutdowns are nothing new (see our Number Of The Week):

Number Of The Week

In fact, there have been three of them in the last eight years, totalling 64 days of limited government operations. As the wages of furloughed workers are eventually paid and contracts kept, there is no lasting economic damage caused.

While a shutdown on Friday is bound to capture plenty of airtime in the press, the more important question is on what budget the US Congress and the Biden administration will finally agree. We remind our readers that President Biden brought forward a whole series of spending plans that drove the yield of the benchmark 10-year Treasury note up from 0.9% in January to a peak of 1.75% in March. After that bonanza, budget news fizzled out and in conjunction with the Covid-19-related slowing of the economy, yields fell to 1.1% in the summer. 

Since then, infection rates in the US have again declined and the more progressive forces in the House of Representatives are calling for the full infrastructure package Biden had presented in the spring. The stronger these progressive forces push their ideas through, the faster the 10-year yield is set to return to the 1.75% level. Fed Chair Powell’s mulling of an end to asset purchases will accelerate this process at the margin. We thus maintain our call for instruments with active duration management or short-dated, moderate credit risk.

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