Fiscal squabbles may trigger short-term volatility in US yields
- Two important deadlines loom for fiscal policy in the US: on September 30, the fiscal year ends and Democrats and Republicans must find an agreement to extend the funding of federal activity and avoid a shutdown. Sometime in the first half of October, if the debt ceiling is not adjusted or suspended, the Treasury will run out of cash.
- A temporary, and overall painless for the economy, shutdown is possible. A default on debt as the ceiling is not lifted appears extremely unlikely, but the Democratic majority will have to find a compromise, either within its representatives or with the Republicans.
- Either way this is likely to entail a sizeable watering down of the ambitious US$ 3.5bn package aimed at overhauling the welfare system and speed up the green transition of the economy. The US$ 1.2tn bipartisan deal on infrastructure may at worst be delayed.
- Even without a catastrophic ending, past experience shows that market volatility increases in the runup to the fiscal deadlines, especially for Treasuries and T-bills. This may be happen by the first half of October.