This file photo shows the US Federal Reserve building in Washington
London: With days to spare before Congress has to reach a deal to keep the US government running, bond traders see a potential showdown breathing new life into the Treasury market’s rally.
Assuming France’s presidential election doesn’t roil markets, the April 28 deadline for Congress to at least pass a stopgap spending measure and avert a government shutdown looks set to take centre stage this week, with the calendar mostly devoid of major economic data or Federal Reserve speakers.
The negotiations in Washington will kick in as investors have lost confidence in the prospect of the administration and lawmakers hammering out fiscal stimulus any time soon, although President Donald Trump intends to release a tax plan this week. Republicans’ failed attempt to overhaul health care and the infighting it revealed have damped expectations for Trump to achieve his policy goals and led 10-year yields to retrace half of their post-election surge.
Should an impasse on financing the government bog down the president’s agenda even further, bond bulls may be re-energized. Ian Lyngen at BMO Capital Markets sees scope for 10-year yields to fall to 2 percent should the standoff stretch into next week without significant progress. They finished last week at about 2.25 percent, not far from the lows of 2017.
On the equities side, bank stocks may be vulnerable if a budget deal can’t be reached. The KBW Bank Index has tumbled about 10 percent since this year’s peak on March 1 amid fading expectations for tax cuts and deregulation.
Speaker Paul Ryan told House Republican colleagues on Saturday that a spending bill will be ready in time to avert a potential shutdown. And there’s always the possibility that lawmakers can pass a stopgap spending measure to keep the government running while negotiations continue. But if a deal can’t be reached and funding expires, the government will partially shut down, similar to what happened in 2013.
The October jobs report, originally slated for November 1, was delayed until November 8 because of the 16-day impasse.
