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Market Update

Debt ceiling talks take center stage in Washington

Date:
September 20, 2021
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Prior week summary

The major U.S. equity indices moved lower for the second consecutive week and long-term Treasury yields increased modestly as market participants digested the latest inflation readings, political wrangling on Capitol Hill, and the continued spread of the COVID-19 delta variant. The 10-year Treasury yield rose slightly over the week to finish Friday at 1.37%, approximately two basis points higher than where it began the week. While the 10-year yield ended Friday near the top-end of its two-month trading range, inflation expectations have remained largely flat over the same time horizon as fears of rampant inflation have eased substantially from the first and second quarter of this year. Tuesday’s release of the Consumer Price Index (CPI) eased those concerns further and sent the 10-year breakeven inflation rate lower by over four basis points to 2.33% when the Bureau of Labor Statistics reported that CPI increased 0.3% month over month, lower than the consensus expectation and the smallest increase since February. Some of the hottest sectors since the start of the year cooled off in August with airfare and used vehicle prices falling 9.1% and 1.5%, respectively. Although the inflation debate is far from over, the latest CPI release gives the Federal Reserve some breathing room as Fed officials have insisted that the price increases seen to date are “transitory” in nature and do not reflect a more persistent firming in inflationary pressures. The New York Fed’s Empire Manufacturing Index, released Wednesday, indicated that New York state manufacturing activity picked up significantly in September on the back of robust levels of new orders and shipments. While the report highlighted an easing in the “prices paid” component, September’s reading remains substantially elevated by historical context, and predictably, supply chain disruptions remained a focus of the report. Finally, retail sales unexpectedly increased 0.7% in August as consumers showed resiliency in the face of a surge in the COVID-19 delta variant. Notably, 10 of the 13 measured categories reported increases in September with car sales leading the categories that experienced declines.

While negotiations concerning the $1 trillion bipartisan infrastructure bill and the $3.5 trillion social spending package have garnered much attention this summer, all eyes turned to the latest developments in the ongoing debt ceiling saga last week. U.S. Treasury Secretary Janet Yellen warned Sunday that if Congress does not act imminently, the Treasury will exhaust all the “extraordinary measures” deployed to conserve cash by October, will be unable to service the current debt load, and will be forced to miss or delay payments, a scenario that could have serious implications for financial markets. In an op-ed published in the Wall Street Journal on Sunday, Secretary Yellen warned that, “the overwhelming consensus among economists and Treasury officials of both parties is that failing to raise the debt limit would produce widespread economic catastrophe.” Senate Minority Leader Mitch McConnell has indicated that he will not look to generate Republican support for a suspension or increase to the debt ceiling and will instead leave the task up to the Democrats saying, “They will have to raise the debt ceiling on their own and they have the tools to do it.” Political wrangling on the issue is expected to continue in earnest in the coming weeks.

With just over three months left until financial institutions will no longer be permitted to issue new LIBOR-based contracts, New York Federal Reserve Bank Vice President Michael Held emphasized that market participants need to be prepared and focused for this new reality last week. Speaking at an International Swaps and Derivatives Association meeting on Wednesday, Held said, “I would suggest that 2023 isn’t the date you need to be focused on right now. At the end of this year, every firm needs to have stopped using Libor for all new exposures. That’s not only a recommendation or best practice or just a good idea. It is explicit supervisory guidance.”

The look forward

All eyes will look to the FOMC’s latest monetary policy on Tuesday and Wednesday. Updated figures on housing starts, new and existing home sales, and jobless claims, among others, dot the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

About the author

  • Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Disclaimers

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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

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