Bond market shows worrying sign as debt-ceiling drama looms

This article originally appeared on The Hill.

The Treasury Department needs the president and Congress to pass a law raising the United States debt limit, or they may soon run out of money to pay their bills, and it could cost the country even more money down the road.

President Trump and Senate Majority Leader Mitch McConnell (R-Ky.) are currently threatening each other that they won’t pass the critical legislation needed to keep the government running.

Trump has publicly blamed McConnell and House Speaker Paul Ryan (R-Wis.) for not attaching the debt-ceiling legislation to a popular veterans benefit bill that recently passed Congress. If they don’t work together to pass the debt-ceiling legislation, the Treasury is expected to run out of money by as early as the beginning of October.

The odds of this happening are low, but if it does happen it could trigger panic in stocks and bonds. One of the biggest reasons the United States can borrow so much money is because the country’s credit rating is so high.

If investors begin to doubt America’s ability to pay back debt, short-term bond yields would peak, like they did in 2011 and 2013. When that happened, yields on all Treasuries rose by four to eight points, costing the country hundreds of millions of dollars.

Already, yields on bonds that mature after the debt ceiling deadline are higher than yields on bonds maturing before it, and that’s something to be concerned about.

Moody’s Investors and Fitch Ratings, two companies that evaluate bonds, have indicated they are watching the situation closely. If the debt ceiling isn’t raised, they will surely downgrade the country’s credit rating.

As a former trader and chairman of the New York Mercantile Exchange (NYMEX), I have far more experience with futures and options trading than bonds. But the markets share similar qualities.

This is not the first time we’ve seen uncertainty and volatility in these markets, and it definitely won’t be the last. When President Obama was in office, there were a couple of times when feuds between Congress and the White House threatened the chances of having the debt ceiling raised, but the legislation was passed every time, albeit at the last minute.

I don’t think we should panic. I strongly believe this crisis will be averted as well. Although I don’t underestimate the unpredictability of the president, he is too well versed in business not to realize the extreme damage it would do to both our country and our economy if our credit and bonds were affected.

Commentary by Richard Schaeffer who served as chairman of NYMEX from 2006-2008, during which time the exchange valuation increased from $900 million to $13 billion. He also managed one of the most successful IPO’s in U.S. history. In addition to serving as NYMEX chairman, Schaeffer was the director of global energy futures for commodity trading powerhouse ABN AMRO, Inc.

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Source: Investment Cnbc
Bond market shows worrying sign as debt-ceiling drama looms