The shutdown does not frighten investors

10 October 2013

These days one of the most talked about issues in the financial world is undoubtedly the stand-off in the United States, i.e., the chance that the world’s greatest economic power will default at the hands of its closest enemy: itself. All fingers point to the Republicans or, more precisely, the group of radical Republicans known as the Tea Party, who, in order to block Obamacare (the healthcare reform that it is presently taking effect), are preventing a debt ceiling agreement from being reached. Vittorio Fontanesi, Kairos Partners manager, explains: “While the government shutdown that this has caused, entailing the suspension of most non-essential services, troubles politicians and significantly inconveniences the people affected, it has not triggered any particular upset on the financial market. Although various sources fear the risk of the country facing technical default within two to three weeks and others estimate that it will not be able to pay its debt by as early as October 17, for the time being, investors do not appear to be betting on this eventuality. However, we do see a wait-and-see approach among operators, who are opting to keep their liquidity in deposits rather than invest it in 1-month treasury bills pending developments in the situation, and they are, in any case, maintaining longer positions in portfolios”. In point of fact, the annual yield on 3-month treasury bills is 0.05%, while 1-month treasuries have gone from a low of zero in mid-September to a peak of 0.34% on October 8.

This shows that the market does not believe the US will default, and even if it did, T-bills have always been considered “risk free”, so the effects on treasury prices are unforeseeable.

So what can we expect in the months to come? Fontanesi, in a comprehensive analysis of international markets, goes so far as to state that “Once the US unknown is behind us, we do not expect a rollercoaster ride in the fourth quarter of the year: things are relatively quiet on all fronts, with interesting opportunities for returns. Even emerging markets have recently rallied somewhat, recovering on major indices; the year-to-date loss is still substantial, but markets are clearly recovering. And Europe’s periphery is relatively strong as well. In short, we hope that 2013 will prove to be constructive once all is said and done”.