Wednesday, October 16, 2013

Live Blogging the US Default

Welcome to this special edition of the Bonddad blog!

Today or tomorrow could be extremely important days in the market as we wait to see it Washington actually solves the debt problem (if only for a mere 4-6 months) or lets the nation default.

9:45 pm CDT: The House passes the bill 285 to 144, with 85 republicans joining all of the democrats. Obama signs the bill. $24,000,000,000 was utterly wasted for nothing. And the clock now starts ticking towards the next crisis in three months.

7:20 pm CDT: The Senate appved kicking the can down the road three months by 81 to 18. On CNN, the lesson Gloria Borger draws is that President Obama needs to anger progressives about Social Security and Medicare.

3:00 CDT: After the deal, the DJIA closes up 200 points, completely reversing yesterday's losses. The 10 year treasury closes at 2.66%, down in yield almost 0.09%, not quite at its October low.

Marketwatch at 11:16 am CDT: "Senate leaders agreed on a plan to fund the federal government through Jan. 15, lift the debt ceiling through Feb. 7, and set up a committee to hammer out broader budget issues. The agreement sets a Dec. 13 deadline for a report on a wide budget plan.". Translation: We'll be back here in 3 months.

10:00 AM CDT: Stock vaulted higher with the DJIA up nearly 200 points on word that the Senate was "very close" to a deal, and that the House would be permitted to vote on that deal. Bonds, meanwhile, did sell off slightly, with the 10 year bond yielding as much as 2.748% (it was at 2.62% on October 3). Bonds matureing on October 24, which had been yielding 0% in late September, were trading as high as 0.72%.

Marketwatch at 8:01 CDT: "[C]learing banks are unwilling to finance paper that matures by the end of year, causing a fairly chaotic environment," said Thomas di Galoma, co-head of fixed-income rates trading at ED&F Man Capital Markets, in a note.

We're already getting preliminary news that the markets are not happy.

From Marketwatch at 7:46 CST: Short-term treasuries are spiking.

From Marketwatch at 7:46 CST: Citigroup has dumped all its short-term treasuries.

NDD here with a brief note: (1) remember that the "best" outcome being discussed right now is that we kick the can down the road for 4 months and then do this all over again. (2) ICSC same store sales last week were only up 1% YoY. That is the worst YoY reading since the recovery began 4 years ago.

From Bonddad: A note on why the short-term treasury spike is so important: there is a market between companies called the repo market. It's essentially a short-term collateralized loan market where one party will essentially give a second market a specific amount of treasury bills in exchange for a short-term loan.  For example, company A needs $10 million because of an unexpected cash short-fall.  They're a large company who just happened to run into a short-term cash crunch.  But while they may be short on cash, they do have Treasury Bills as part of their cash management strategy.  So they give $10 million of T-Bills to a second party who essentially makes a collateralized $10 million dollar loan to the first party.  30 days later, Company A has sufficient cash on hand to repay the loan, so they do so and get their $10 million in T-Bills back.

Here's the rub: this transaction which is incredibly common and a bedrock of modern treasury management requires a "riskless" security to perform.  Enter the T-Bill which is backed by the full faith and credit of the US government.  The T-Bill makes this a routine and standard transaction.  But remove the riskless nature of the T-Bill and you've got big problems in the financial world as this market grinds to a halt, making short-term lending impossible.  That completely cripples trade and commerce, and that is why this situation is so deadly.

From Bonddad: Krugman as a link to a Macroadvisers report which shows that since these budget shenanigans began we've lost GDP.

Senate is taking the lead in budget negotiations. 

Here's a piece on XE on the already negative impacts.

Warren Buffet Calls it like he sees it: this is "asinine."

Senate is real close to a deal:

Top aides to Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) are working to finalize plans to raise the debt limit through Feb. 7 and end the 16-day-old government shutdown, after a House Republican effort to forge a solution collapsed Tuesday in humiliating failure.

“We are getting real close,” Sen. Charles E. Schumer (D-N.Y.) said just before 11 a.m., as Republicans began to enter a meeting at which they were expected to finalize the plan. 

As of 12:21 CST, the markets are still rallying.  The SPYs gapped higher at the open and then continued to move up, eventually peaking at 172.  Since then we've seen a slight downward consolidation, but not a panic sell-off.

In addition, it appears the Senate has a deal:

Senate leaders announced last-minute agreement Wednesday to avert a threatened Treasury default and reopen the government after a partial, 16-day shutdown. Congress raced to pass the measure by day's end.

The Dow Jones industrial average soared on the news that the threat of default was fading, flirting with a 200-point gain in morning trading.

"This is a time for reconciliation," said Senate Majority Leader Harry Reid of the agreement he had forged with the GOP leader, Sen. Mitch McConnell of Kentucky.

McConnell said that with the accord, Republicans had sealed a deal to have spending in one area of the budget decline for two years in a row, adding, "we're not going back."

One prominent tea party lawmaker, Sen. Ted Cruz of Texas, said he would oppose the plan, but not seek to delay its passage.

Now we move on to the House, where the results are anything but certain.

Treasuries are also rallying in anticipation of a deal.  From the FT:

It's not just stocks that are rallying as confidence grows that Congress will pass a deal that removes the possibility of a US default.

US government bonds are, too. The yield on the ten-year note fell 8 basis points to 2.67 per cent, echoing gains for longer and shorter maturities.