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How The Market Reacted To Prior Government Shut Downs
With even the most compromising politicians on both sides of the aisle admitting at least a brief government shutdown is inevitable (and according to Stone McCarthy the shutdown will hardly be brief and will affect the timely release of such major economic indicators as construction spending, factory orders and the employment number on Friday), the next question arises: how have markets responded to not only shutdowns, but also debt ceiling impasse (with the memory of August 2011 still very vivid) in the past. Here is the full answer from Deutsche's Dominic Constam.
Market reactions to prior shutdowns and debt limit events, from Deutsche Bank
Treasuries rallied most of the week, as lawmakers debated how to fund the federal government to avoid a shutdown. We analyzed market reactions to prior government shutdowns and debt limit events. The longest government shutdown occurred between December 15, 1995 and January 6, 1996 for about three weeks. There was a five-day shutdown in November 1995. In 1980s, government shutdowns were more frequent, but lasted shorter in most cases.
There have been far more frequent debt limit increases in recent years. From the financial market crisis in 2008 to present, the debt limit was raised seven times. The overall market reactions to the events were:
- Treasuries rallied modestly into shutdowns, and sold off afterwards. The curve was mixed. In recent rallies, curve tends to flatten, and vice versa. When rates were higher in 1990s and 1980s, curve tended to steepen in rallies, as perhaps the front end outperformed in flight-to-quality trades. In the 2011 debt limit increase, Treasuries rallied all the way through, due to the S&P downgrade on Treasuries and the sell-off in risk assets.
- Swap spreads were stable or slightly tightened during the shutdowns, and marginally widened afterwards. Around debt ceiling events, spread movements were mixed with a marginal widening bias on average.
- Stocks tended to sell-off prior to the shutdowns/debt limits, and recovered afterwards.
- The dollar (as measured by the DXY index) tended to weaken into the shutdowns/debt limits, but strengthen afterwards.
In a shutdown scenario, government agency-compiled economic data releases could be delayed, while essential services, such as Treasury auctions, interest and principal payments on Treasury securities will not be affected. Some federal workers could be furloughed. The most recent government shutdown occurred in late 1995 to early 1996, and lasted about three weeks. Payroll and retail sales data were delayed during that period.
In his letter to Congress on September 25, Secretary Lew forecasted the extraordinary measures to “be exhausted no later than October 17.” The Treasury will have only approximately $30 billion in cash balance. Therefore, the hard deadline for the debt limit increase could be in late October to early November. Treasury needs to make some large payments on November 1 (e.g., Social Security, Medicare, Military and veteran pays, etc.). So November 1 is a critical date. Treasury securities, bills, short-dated coupons, and STRIPS, maturing in late October and early November have cheapened this week on debt limit concerns. CDS spreads have widened. We expect a debt ceiling deal, and no US Treasury CDS event to occur.
In recent debt limit episodes, prioritization of payments has been discussed. In reality, it’s difficult to prioritize hundreds of monthly payments that go out of Treasury. In April 2013, House Republicans passed a bill that prioritizes payments. It grants Treasury the authority to borrow to fund principal and interest payments on public debt and the Social Security trust funds. President Obama indicated that he would veto the measure if t were to be approved by Senate.
- In eight of the last 12 times heading into a debt limit deadline, rates market rallied. The 10y yield ranged 3 to 26 bps lower during the five days before
the debt ceiling resolution.- Yields tended to rise after the resolution. Also in eight of the last 12 episodes, 10y yields ranged between 1 and 27 bps higher ten days later.
- Swap spreads shown a widening bias prior to the resolution and a tightening bias subsequent to it. Tighter spreads coming out of a debt limit increase were observed in eight of the last 12 episodes.
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Finally, anyone who thinks they have a bearing on the political theater may be wise to reevaluate. For once, Washington's theattrical muppetry may have run out of control. From Stone McCarthy: "At this point, we don't see how this gets resolved quickly. We also don't know what the implications are for the battle over the debt limit. Some observers think linking a fight over Obamacare to the CR will allow the Tea Party to get it out of its system, so to speak, and as a result, it'll be easier to get an increase in the debt limit. We're not so sanguine. That scenario might make some sense if Senate Democrats and the White House made some concessions on the ACA in order to prevent or end a government shutdown. But right now, that doesn't seem likely.
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Gosh...
It's such a bleak picture of our collective future...
Who the fuck is gonna walk my dog if the Federal Gubamnit shuts down?
Who gives a fuck if the Federal Gubamint shuts down? The dog can crap in the yard instead of my neighbor's. There goes my sense of entitlement, here comes responsibility and consequences for my actions...
Markets? Are we still calling these markets? Come on already.
farcets
If shutdown of AmeriKa is only delay release of economic number, please to let Boris help. Mother-in-law is prepare Borsch and Cabbage Roll and we are all eat to generation of much, how do you say, warm flatulence and produce similar accurate data.
Weren't these past events before the world economy's near fatal debt condition left it on life support?
When this economy looks at the words BANKRUPT or DEFAULT it sees the words GAME OVER.
If we could somehow get rid of this pestilent government...I'd be pretty stoked about the future.
A shutdown is as close as we'll get (for now)...
I love the smell of no government in the morning!!!
Futures opened nicely RED. Fuck you muppets. Time for your 401Ks to die because of Obamacare. LOL.
Who gives a fuck if the federal government is running? The way I see it it's a benefit. No wars. No lying. No stealing no FBI creating false flags. No CIA running drugs. No ATF running guns. Holder doesn't get paid. Wall Street has no one to bribe. It's a win win. Shut it down permanently.
... but, but, but, if state is pause function, who is protect silly AmeriKa citizenry from self-immolation and boredom?
... or maybe America citizenry is awake from deep slumber and get back to work?
Silly AmeriKa citzenry still have X Factor, is no worry, Boris. The slumber will continue...
Now, if only silly AmeriKa citzenry realize during pause how much Regime rhetoric full of ass fumes and how easily they can live without craddle-to-grave government impeding productivity and freedom 24/7!
Kralizec not optimistic. People tell Kralizec he is pessimist, Kralizec say reality is pessimistic enough thank you.
We all know the outcome of this. Republicans will cave into Democrat's demands, the debt ceiling will be lifted once again and the markets will hit new highs based on the "good" news. Oh and we won't hear a word from the ratings agencies. Nothing to see here folks, just keep consuming and shut the hell up.
That's Bernanke way to bring down interest on treasuries! Shut down the government for weeks till the 10y is back at below 2%! Brilliant! They said they would use unconventional monetary policy but I never expected that!
bank holiday
Shut this Fucker Down.....
It will shut down.
The real problem is keeping it that way...
The beast will rise again...and the tab for all that back-pay will be swell...
Gahhhh!!!
No possible comparison to the shutdowns of the U.S. Government's past given the size and scale that it has been allowed to grow.
Unless of course you were to compare it to WWII, Korea and Vietnam when it had that wonderful institution called the draft.
This is why the U.S. Saudi's and Israeli's will require another casus belli on the scale of 9/11 to get American involvement "baited".
And this is there collective dilemma after 'Crying Wolf' too many times.
I remember the time when the Belgian government was shut down for a year post elections. After a while politicians started to panic because no one seemed to notice a difference.
True dat. No government for a year +... nobody gave a fuck. A country in Europe, Belgium is more free market than America these days. That ought to be embarrassing.
AND Congress and BO get paid anyway on a shutdown
If the U.S. government shut down for a year there would be a huge difference: the world would be a significantly better place.
"will affect the timely release of such major economic indicators as construction spending, factory orders and the employment number on Friday"
We don't need no stinking Government statistics. We have FRAUD M'Fers.
Jack the Lew opposes "Prioritized Payments". Spoken like a real-world CFO. NOT!
All brinksmanship, all show, all theater for everybody get their talking points in, so they can use them in the 2014 election.
Thread Jack:
http://www.huffingtonpost.ca/
re: POT
Yawn, who cares. The government workers are always looking for time off with pay.
They'll receive backpay once the money is freed up. Just another reason to rally the market again once it's over.
Someone just got very scared of gold jumping and promptly stamped on it hard
So, Stalingrad Poorsky should go up? It actually needs to try harder now, starting at about -10....
We need to stop playing into the lie that the government "shuts down". If only. It's more an unscheduled paid holiday for government workers, which really doesn't affect their productivity, i.e. they do as much sitting on the sofa at home as sitting in their offices. (Military excepted)
Is ObamaCare ready for the grand opening? The Republicans think not and they are setting the stage for "We tried to protect you" with our 1 year delay bill. That's their gamble. The success or failure of the program will likely effect 2014/16 votes. I'm sure both sides will play it up, the other down. No matter, if it fails it will be Bush's/Rep fault.
man did you miss the point, OBAMA wrote a dozen exemptions AFTER the bill was passed, now the house wants a YEAR exemption to match the YEAR exemption OBAMA gave employers. if you are required to sign up and you have an EMPLOYER who should be required to set the terms, the EMPLOYER is not and you are thrown in with everyone who has to get a policy as though they had none. does OBAMA love corporate america, and does he hate (white) working people...??? count the ways
Bear in mind that delaying the employers has nothing to do with accommodating businesses (Obama doesn't give a crap about them), it removes the income test for subsidies in the exchanges. It allows people to lie about their income to get a higher subsidy.
This show is better than Hollywood (but not better than Nollywood).
I think it is important to note that this will be the first government shutdown of the internet era, which exploded onto the domestic scene in 1996 into early 1997. Why is this important? Because the internet and the 24/7 news and political cycle (Fox News which launched Oct. 7, 1996 and perhaps in line with the rollout of the mass internet). help promote polarized thinking which feeds their businesses with their ideology. The debt limit squabbles (most recently escalated in July-August 2011) as we know involve credit limit type borrowing authority for spending already passed by the Congress. The CR does involve spending after October 1, funds which normally would have been spent to support government operations Americans have come to expect.
With the advent of the internet, we now have 536 presidents in Washington DC, not just 1. Every one of these individuals maintain, at least in public, that they were elected to serve their constituents and to represent their views. Every one of these individuals maintain they have their own sphere of authority equivalent to Obama, and that issues decided must conform to their idea of their beliefs as well as that of their constituents. The GOP as a block maintain since one of their public core ideologies is opposition to Obamacare, that they were elected to oppose this legislation, and by virtue of the fact that they got elected, that vindicates the basis on how they ran and what they are supposed to uphold.
The concept of a United States of America is quickly fracturing in practice, this is primarily all about blue nation and red nation now. It is likely we have been a blue nation and a red nation all along, but the internet and its 24/7 news cycle, have brought these distinctions among the 'American' public to light. For example, if Obamacare is not expected to benefit a certain voter, that voter has come to expect and even demand of his representatives, that Obamacare is opposed tooth and nail with every tool available, without compromise or negotiation. 30 years ago, even 20 years ago, if a member of Congress voted along with members of the other side on an issue, that was the norm and not news at all. Now, if a GOP member breaks ranks on an issue such as Obamacare, that member is excoriated and will likely suffer a primary challenge and loss in the next election. The same can be said to a lesser degree for the Dems, though not as monolithic as the GOP.
Because of the way this has been framed in the internet, Obamacare has been defined as the Waterloo rallying issue for the Republicans to maintain their relevancy in national politics. They have lost to Obama twice now, and have done little effective introspection to understand the reasons for this. No matter how hard they try at this, they are only capped at 47-49% support in national elections, not enough to get a president elected but enough as a minority party to gum up the works if they so chose like they are choosing now.
They may backdoor something out of the shutdown this week to take off the pressure, knowing the backstop debt limit debate is there as a backstop to deal with their catalyst issue, Obamacare. None of the apolitical analysts I have seen on the inside expect a resolution for the foreseeable future when the debt limit debate is included, and Sarah Palin fired a shot across the bow by hinting about the 2014 elections not being that far off. Now whether Washington can stay closed for 6-12 months seem incredible, but this is a last ditch as seen by a number of those in Congress, giving in is seen as the same as a death sentence for these members. And once more, this time we have the aggravating factor of the bright light of the internet and the news cycle forcing these lawmakers to hold the line of their stated positions, either for or against.
Perhaps no other institution has been as effected with worldwide web as much as Washington DC and its institutions. 1996 was the last relatively harmonious election the 'USA' has had. Court fights, talk of secession, etc., have followed every national election since. There is no such thing now as a politician who can appeal to both sides, because the internet will force conformity into ideological beliefs. Supreme Court nominees are always contentious now, along with many lower level appointees, where deals are made to clear filibusters.
I will comment at the end that while the internet is a good thing on balance, none of these national political implications are positive and have greatly accelerated the process of deteriorating what was once a great country with all its faults. When a voting block can say tough shit to 50 million people, and nix both Obamacare and Food Stamps becuase it conflicts with ideology, that sums up the national sentiment any more. When a voting block can throttle FEMA with this shutdown and its support for those affected the Colorado floods, that sums up the national sentiment any more. When a voting block can so blindly oppose an issue such as Obamacare before the voting public knows tonight in dollars and cents for their households what we are even talking about, they are appealing to the American people's ignorance and that sums up the national sentiment any more as well. National debates have degenerated into dumbed down discussions of ideological views without a deeper understanding of what is being discussed in depth. And once more it is all brought to you by the internet and the 24/7 news cycle. In its zeal to protect what it calls 'Free Speech', the media really does a poor job overall at educating people any more. I see no news recently on Colorado now for example, does that mean this issue went away? How about Sandy and its aftermath and what those people are dealing with? How about the people who have left the workforce with the economy as it is since 2007-08? What about the housing market and its overall depressed state still, where QE tracking like ZH does, can fuck up the show faster than anything if they even think the 'mothers milk' of QE is pulled out or ever scaled back? The transient natiure of internet reporting helps feed this dumbing down effect. The documentary 'The Power Principle' depicts how this strategy has been foisted on the American people for years now.
Enjoy October, it is liable to be a very shitty month in Washington DC. Anyone who has money invested right now in a long position in any meaningful way, is a lot more bold and has a lot more faith in this country and its institutions than I do any more. I have been out of the markets for weeks now, and until we see a lot less anarchy, I am staying out. I am not forecasting a Civil War unlike Sen. Harkin compared recently, but in my view his remarks were pretty accurate. This is the biggest ideological split the country has seen since the Civil War, let's hope we do not go down that same road eventually.
I wish all governements would shut down, liars, cheats and all useless.
We might fare better!
Cheers Wattie
Did anyone see the study last week that shows incomes in US declining everywhere EXCEPT DC? WTF?
I say layoff about 20% of the over-paid unionized gov't employees permannetly. Let 'em see what the real world is like.
De-volve gov't back to the state and local levels where the people have more control.
goverment shutdown or burning of Reichstag?