NEW YORK – Global investors have stayed remarkably confident in the U.S. despite one budget crisis after another. But they’re starting to wonder if the latest political impasse will tarnish America’s Teflon image.
So far, the nation’s reputation as the world’s best place to invest remains unshaken. The 10-year Treasury note, the bedrock of the government’s debt market, has attracted more money in recent weeks, not less, and the stock market is still close to record highs.
Still, the squabbling in Washington over the debt ceiling, which follows squabbling over automatic spending cuts earlier this year, is severely testing investor patience. Many fear a default would be a tipping point, sending bond and stock prices plunging.
The repeated budgetary brinkmanship is making some question their faith in the United States.
“The more times you give politicians a chance to completely muck something up, the more chance … they will do it,” says Gary Jenkins, managing director of Swordfish Research in London. “If this were to become a regular occurrence, then, who knows?”
The U.S. Treasury has warned it will run out of money if Congress does not agree to raise a $16.7 trillion cap on borrowing by next Thursday and allow it to issue more debt. That has raised the specter that the United States wouldn’t be able to pay interest on its debt. Republicans say they won’t allow more borrowing unless Democrats agree to restructure benefits programs or cut the deficit; the White House has ruled out negotiations tied to the debt ceiling.
The Treasury says a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession.
Even with such a dire scenario, investors continue to buy Treasurys. Tuesday, the yield on the 10-year note, which falls when investors buy, was 2.63 percent, near a two-month low.
The debt ceiling fight echoes the congressional standoff over the same issue in the summer of 2011.
Experts say the United States attracts money now for the same reason it did back then: Many other countries are faring worse. China, India and Brazil are slowing dramatically. Japan is struggling to shake off a two-decade slump. The 17 countries of the eurozone have just emerged from a recession.
“We’re the best of worst,” says David Sherman, head of Cohanzick Management, a manager of bond funds. He adds that the United States tends to “bounce back” from crises.
In the 2011 crisis, for example, U.S. stock prices dropped, but recovered most of their losses by the end of the year.
Many investors think the costs of a default are too high for politicians not to raise the borrowing cap before the deadline. But they’re still worried.
“If we’re having trouble with this government shutdown, and no negotiation, what’s going to happen in two weeks?” asks Talley Leger, a strategist for Macro Vision Research, an investment consultancy.
The precedent for this is the 778-point drop in the Dow Jones industrial average Sept. 29, 2008, after Congress rejected a $700 billion bailout bill, known as Troubled Asset Relief Program. The TARP bill was passed within days.
“This whole shutdown could easily drag out to the debt deadline,” says Bill Strazzullo, chief market strategist of Bell Curve Trading.
His guess is that the Dow falls to 14,200 – down 576 points from Tuesday’s close.
The prospects for U.S. bonds are more complicated.
When investors anticipate a crisis, they tend to buy U.S. bonds. Treasurys are one of the mostly widely held assets in the world, so it’s easy to buy and sell them, even when people are panicking.
“People crave Treasurys because it is the most liquid market,” says Mark Vitner, a senior economist at Wells Fargo.
There is another reason to buy Treasurys. The worse things get, the less likely it is that the Federal Reserve will slow its economic stimulus.
Randall Warren, chief investment officer of Warren Financial Service in Exton, Pa., says that if Americans are made aware of their large debt, they may be more willing to accept an increase in taxes or a cut in spending.
In that case, he said, “the easier it will be for Congress to dish out the medicine.”