The U.S. government is in full shutdown mode. This comes after a complete collapse in negotiations within the GOP-led Senate over a short-term continuing resolution spending bill. The impasse has stoked a grassroots insurgency against the extension of proposed health care tax credits. Americans, especially Democrats, have been clamoring for the inclusion of this specific measure ever since the spending bill was first introduced – and rightfully so. In sharp contrast, Senate and House Republicans have been adamantly opposed to this extension, making negotiations even more difficult.
President Donald Trump criticized the Democrats’ approach, stating, “I didn’t see them bend even a little bit,” suggesting that the stalemate is not solely a Republican issue.
The shutdown coincides with dramatic increases in the financial markets. ADP employment report Private payrolls dropped by 32,000 in September, per the ADP report released Wednesday morning. This morning’s decline on that front has influenced Treasury yields, with the yield on the 30-year bond shedding 3 basis points to 4.704%. At the same time, the 10-year Treasury yield was 4 basis points lower at 4.108%. As all financial wonks will tell you, yields and prices are inversely related – when yields go up, prices go down.
William Lee, chief economist at the Milken Institute, explained how the shutdown would re-shape the market playing field. Here’s what he told us in Wednesday’s “Worldwide Exchange” interview. He remarked on the historical context of government shutdowns, stating, “The history of shutdowns really has had so little impact on the real economy because essentially, by the end of the shutdowns, everything goes back to the way it was.” Unlike previous years, he conceded that maybe this time really would be different — largely because of the strategic benefits available to both political parties.
This time it could be very different as both sides play it very strategically, Lee explained. “The Republicans are saying, ‘this is a good time for us to implement the kind of changes Elon Musk put in place with DOGE.’ The Democrats are really bearing down and saying, ‘this is our turn to be strategic and get back the legislation we want to put in place.’”
As those negotiations rage on in the midst of this government shutdown, fears are growing over the credit quality of U.S. debt. Market analysts are concerned that continued uncertainty will be damaging to Treasury prices. That would be a recipe for increasing yields and adding new stressors to a tremendously disorderly fiscal environment.