Thursday, October 10, 2013

What Me, Worry?

Republican and Democratic Party Favorables, 1992-2013
Source: Wall Street Journal

At an internal meeting this morning I was asked to give a few comments about the current debt ceiling debacle.

When I was first approached to discuss this topic earlier this week I hoped that it would not be necessary, and that cooler heads would have prevailed in Washington.

However, as we get closer to October 17 - which is the "drop dead" date that Treasury Secretary Jack Lew has mentioned on numerous occasions - the markets are getting nervous.

Treasury bills maturing on October 17 now offer a yield of 0.49%.  Bill maturing next January yield 0.05%.  The money markets are signalling an increased level of concern.

So too are institutional investors.  According to an Associated Press article, mutual fund giant Fidelity has sold all of the Treasury holdings in its money market funds in favor of corporate debt:

NEW YORK (AP) — Fidelity Investments, the nation's largest money market mutual fund manager, has sold all of its short-term U.S. government debt — the latest sign that investors are increasingly nervous about the possibility of a government default.

Money market portfolio managers at Fidelity Investments started selling off short-term U.S. government debt a couple of weeks ago, Nancy Prior, president of Fidelity's Money Market Group, said Wednesday. While Fidelity expects the debt ceiling issue to be resolved, the Boston-based asset manager said it has taken steps to protect investors.

"We expect Congress will take the steps necessary to avoid default, but in our position as money market managers we have to take precautionary measures," Prior said.

Meanwhile they are reports that the large money center banks (Bank of America, etc.) are starting to build cash positions in case depositors start making large withdrawals.

This is getting pretty ridiculous, in my opinion.  As the chart above indicates, favorability ratings for both parties continue to sink. The 28% rating for the Republicans is the lowest rating since Gallup started this poll in 1982, according to the Wall Street Journal.

The stock markets are soaring this morning as word filters out that a compromise might be in the offing.  Let's hope this nightmare soon ends.