It may be time to take gains in Treasurys

Thursday's moves in Washington are all the reason you need. The trend is changing in the Treasury market.

By Jim J. Jubak Sep 26, 2013 7:44PM
Image: US Capitol (© Donovan Reese/Getty Images)OK, it was just one basis point. But Treasurys did move lower Thursday, ending what had been a four-day winning streak.

Maybe that was just a reaction to lower-than-expected initial claims for unemployment for the week that ended Sept. 21. Fewer people filing their first claims for unemployment means fewer firings and could mean an uptick in employment and economic growth. Faster growth reads right now as bad for bonds since it brings the end of the Fed's $85 billion in asset purchases nearer.

But since 10-year yields have dropped from 3.05% in early September to just 2.64% Wednesday, we might be due for a turn in the trend. And if you're looking for a reason to take your gains in Treasurys -- which would result in falling prices and climbing yields -- Thursday's moves in Washington are all the reason that you need. (Adding to my sense that the trend has changed in the Treasury market is Thursday's weak auction for $29 billion in 7-year Treasurys.) 

Attention is starting to shift -- correctly or not (I say correctly) -- from the budget "shut down the government" battle -- to the struggle over raising the debt ceiling. It now looks like the Senate will strip out the defund Obamacare language in the continuing resolution the House sent to over and send back a clean continuing resolution to the House that would fund the government through Nov. 15. 

The House, pundits now say (and I’m finding the Washington Post's Wonkblog a great resource in following the ins and outs of this mess) may attach a few symbolic measures to the continuing resolution, but is likely to pass something like a relatively clean continuing resolution in the early days of next week. That would turn the government shutdown into an annoyance of a few days. 

The main reason to believe this scenario is that the House Republican leadership, including House Speaker John Boehner, looks like it's pivoting from the budget fight to the debt ceiling battle. It's that likelihood and evidence that House Republicans are digging for that fight that could easily reverse the post-Fed-meeting bond rally.

The National Review got a hold of a copy of the House Republicans' debt ceiling bill and as evidence of dig-in-your heels strategy, it’s pretty chilling to bond holders who don’t think a default on U.S. government debt is a good thing.

Here are the main provisions at the moment. In return for a one-year suspension of the debt ceiling, the bill demands, just to hit some of the highlights, a year’s delay in Obamacare, the enactment of Rep. Paul Ryan’s tax reform plan, approval of the Keystone pipeline, an expansion of offshore oil drilling and the opening of more federal lands to drilling, a suspension of the Environmental Protection Agency’s efforts to regulate carbon emissions, reform of the federal employee retirement program, an overhaul of Dodd-Frank, more Congressional control of the budget for the Consumer Financial Protection Bureau, more means-testing in Medicare, and repeal of the Public Health Trust Fund.

This isn't a serious opening bid in negotiations. It’s a my-way-or-the-highway statement. And, if it truly measures the influence of the most conservative members of the Republican caucus in the House, this initial plan suggests a very bitter and long fight over the debt ceiling. 

Treasury Secretary Jack Lew has told Congress that the Treasury Department would exhaust emergency measures to pay government obligations no later than Oct. 17. That's a more pessimistic estimate than that of the Congressional Budget Office, which predicted that the Treasury would use up funds between Oct. 22 and Oct. 31. That would make it difficult for the government to pay the roughly $55 billion in Social Security, Medicare, and military pay due on Nov. 1. 

After Oct. 17, the Bipartisan Policy Center has concluded, government revenue -- without borrowing -- will cover 68% of its bills for the rest of October.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here
2Comments
Sep 27, 2013 2:22PM
avatar

Mr Jubak, you are correct indeed.

The US treasuries may be the best looking lipsticked pig in the barn within the western world.  But eventually the world will sober up and realize it is still just a pig.

Inflation, global uncertainty, economic contraction, excessive central bank intervention and further US deficits will eventually pound these worthless claims into the ground.

5 years on and America has not instituted real reform within any economic area.  QE was a window in which to right the wrongs and correct the inefficiences. 

Time's up. 

Sep 27, 2013 4:46PM
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"Attention is starting to shift -- correctly or not (I say correctly) -- from the budget "shut down the government" battle -- to the struggle over raising the debt ceiling."

The Senate sent it back already. The House won't react without Obamacare stricken from it. That's a Pass Go Go Directly To Jail Card on the Monopoly Board. The shutdown isn't an end-all, it's the impasse that follows that will destroy us. Are you ready for a 10,000 point loss for the Dow? What stops it? I suspect we are likely to see two stalwart parties and all the messiness they are- go down like overladen pirate ships. We haven't had economy or stability really-- this century yet. Everyone understands-- it wasn't real money and no one can keep it... right? There are $630 TRILLION in derivatives outstanding. To get them called false, all falsities go with them. 
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