You wouldn’t know that there was anything to worry about from the U.S. stock market. So what that the President of the United States has threatened to shut down the government unless Congress funds The Wall. So what that the promised tax cuts so near and dear to CEOs and Wall Street won’t happen unless there is a budget or some stop gap measure to fund the government by October 1. So what the Federal Reserve steadfastly refuses to take another interest rate increase off the table for 2017.
As of 3:30 New York time today the Standard & Poor’s 500 stock index was down just 0.16% and hangs stubbornly at 2440.28 just above the 2438 level that has marked support since June. The CBOE S&P 500 Volatility Index (VIX) certainly isn’t showing any uptick in fear. The VIX is up just 1.06% today to 12.38 as of 3:30.
But if you look at the bond market, you will see signs of concern. Yesterday, August 23, anxiety popped up in the shorter end of the Treasury market. The spread between the yield on one-month and three-month Treasury bills tumbled to 1.16 basis points. That’s the flattest yield curve since February. 100 basis points equal 1 percentage point so we’re talking about a very small difference in yield. Normally investors would demand more yield in exchange for holding longer-dated three-month Treasuries. But right now they’re asking for more interest–almost as much as on three-month debt–to hold one-month Treasuries. That looks like an expression of fear, doubt, worry, whatever, about the possibility of a short-term default by the U.S. government if Congress can’t get its act together to raise the debt ceiling and to pass a bill to fund the U.S. government by October 1.
Meanwhile, in this morning’s tweets President Donald Trump blasted Republican leaders Senator Mitch McConnell and Representative Paul Ryan for failing to include a debt ceiling increase in the recently passed–and very popular without the debt ceiling language–veterans bill. “Could have been easy–now a mess,” the President tweeted. This ignores a clear promise from conservative Republicans to block any increase in the debt ceiling that isn’t coupled with deep spending cuts the would likely kill the bill in the Senate.
Just a matter of procedure to keep in mind: The Republicans can use a Senate process called reconciliation to pass their tax cut legislation with just 51 votes–instead of 60–in the Senate. (Republicans have 52 votes in the Senate on a straight party-line count.) But to use reconciliation, Congress first has to pass a budget or some other bill to fund the government. (In other words to use reconciliation, you have to have something to reconcile tax cuts too.) Which means, effectively, no budget, no tax cuts. That’s the barrel that McConnell and Ryan find themselves over since they have not yet found a budget formula that will keep Republican votes behind a funding bill.