Might bond yields fall?
Fears of recession might outweigh fears of default
By Buttonwood
MIGHT Treasury bond yields actually fall if the Congress fails to agree on an increase in the debt ceiling by August 2? It may sound counter-intuitive but it may explain why 10-year yields are still below 3%, despite the imminence of the deadline.
If no deal is done, the US Treasury will have to start prioritising payments. It will, most people in the market assume, be desperate to avoid a technical default. that means it will have to cut back on spending (as indeed the Tea Party movement desires). This may well involve not paying employees, suppliers or even benefit recipients. The effect will be a severe hit to demand for those affected, which will make the August data look weak indeed. If prolonged, the analysts at Fxpro think the result could be a return to recession.
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