Government Shutdown Ends – Markets Ignore Looming Debt and Bond Market Threat For Now

– U.S. Senate pass a temporary spending plan through Feb. 8 to end shutdown

– Markets shrug off both government shutdown and re-opening

– Markets, government and media ignoring worsening US debt position

– Gold responding positively to U.S. dysfunction, rising US Treasury yields & weaker dollar

– U.S. government national debt is $20.6 trillion and increasing rapidly

– ‘Bonds, like men, are in a bear market’ – Bill Gross

Editor: Mark O’Byrne

Investors “irrational exuberance” continues after the largely unexpected U.S. government shutdown saw stocks continue on their merry way higher. After the government shut down, U.S. stocks rose and as the U.S. government reopened, U.S stocks rose again.

During the shutdown there had been little reaction from the markets, although gold did tick up on the back of a weaker dollar. The US dollar index struggled to steer clear of a recent three-year low against a basket of currencies and the  yield on the 10-year Treasury hit its highest since level since September 2014.

This is not surprising when one considers that in the previous two government shutdowns, markets also remained calm.

This is the twentieth US government shutdown in forty years.

This latest one was priced in long before it happened. Look how (little) markets have reacted to other events which were so expected to tip them over the edge: since Trump’s win – the S&P 500 is up 35% since that fateful day.

The 2013 shutdown? Sure, it initially triggered a sharp fall in the S&P 500 but it more than recovered by the time the shutdown came to an end. In fact, U.S stocks ended 2013 with near 30% gains.

Upon the announcement of the latest shutdown deal U.S. stocks advanced as each of Wall Street’s main indexes touched a record intraday level.

Debt ceiling can be moved but not ignored

Just like the other shutdowns markets were practically yawning at this latest display of dysfunction by the US government.

But this one should have been different. Previously we have not seen a US debt position in such bad shape nor have previous shutdowns happened on the brink of a U.S. bond bear market.

Currently, the U.S. government national debt is $20.6 trillion and increasing rapidly. The Federal Debt Ceiling was extended by Trump in December once again. Despite this increase it will need more borrowing authority to keep operating past April.

For now, the government have merely patched over a big hole which will still be there in February when the short-term deal ends and certainly in April when the cash runs out.

Should the markets begin to connect another possible government shutdown and a default then investors will begin to feel nervous which bodes well for gold.

The last time we saw a debt-ceiling and government showdown risk come together was in 2011. This prompted rating agency Standard & Poor’s to strip the US of its top-notch AAA-rating.

In order to avoid this happening again Congress may raise the debt ceiling before it becomes a binding constraint in the next round of negotiations. Once again kicking the can down the road and storing up much more financial pain for the U.S. in the medium and long term.

What happens if they don’t raise the debt ceiling? The U.S. could default on debt payments and bond yields would surge causing the cost of borrowing to soar as government debt loses its sterling credit rating.

The Bond Bear is circling

Bond yields are, listening to many commentators, nothing to be concerned about. However, some of the smartest money in the bond market is now warning. ‘Bond king’ Bill Gross believes the bond bear market is here and we should all be prepared.