Gov’t Shutdown Close, Debt Ceiling Next Up

The U.S. Government appears headed for an imminent shutdown due to a lack of agreement on a federal budget.  After a weekend of failed negotiations and a House bill that has little chance of clearing the Senate, a midnight deadline to pass a fiscal year 2014 budget appears unlikely to be met.  “Nonessential” government workers will be furloughed, presenting a new challenge to an economy that is struggling to grow.  This fiscal pressure was a main reason cited by the Federal Reserve two weeks ago when deciding to maintain their monetary support of the economy through bond purchases (quantitative easing or QE).  The uncertainty caused by the latest dysfunction in Washington is causing bond prices to rise as investors demand the safety of U.S. Treasurys.  Paradoxically, even the threat of default on U.S. Government obligations will likely cause Treasury bond prices to rise as investors flee riskier assets such as stocks.  This was the price action that we saw two years ago when a similar situation occurred, and one that we would expect to continue until Congress comes to an agreement on both a budget and an increase in the debt ceiling.