Wall Street strategists are beginning to realize that financial markets may be overly optimistic about the recent debt ceiling standoff in the United States, warning that markets could be volatile in the future.
Wells Fargo & CoThe risk premium on Treasury bills is likely to rise, strategists say. If the debt impasse is not resolved by the time the government runs out of cash, the safe-haven currency, the yen, could outperform other assets.
Us Treasury Secretary Janet Yellen has previously revealed that the federal government may run out of cash on October 18. The risk premium for Treasury bills maturing on October 18 is currently 10-12 basis points, while the risk premium for Treasury bills due on October 21 and 26 is as high as 13 basis points, Wells Fargo & Co said, and the bank expects it to approach 20 basis points.
Wells Fargo & Co strategists Zachary Griffiths and Erik Nelson wrote in a report on Tuesday that investors underestimated the impact of the debt ceiling and that the stalemate could plunge the market into 2011-style volatility.
The debt ceiling problem in 2011 led S & P to downgrade the United States from AAA that year, the decline in long-term Treasury yields and U. S. stocks widened, and the European debt crisis also had an impact on the market.
Wells Fargo & Co questioned whether a rating agency would downgrade the US, but Fitch said last week that even for securities other than Treasuries, US AAA status could be threatened if the Treasury delayed payment or defaulted.
Market reaction
Wells Fargo & Co said that if Fitch downgraded the US before the debt ceiling was resolved, the 10-year yield would fall by 15-20 basis points in a day or two, and the gap between 2-year and 10-year yields would narrow by 10-15 basis points.
'The yen is likely to benefit from any market turmoil, and customers who have short-term exposure to the yen (no more than a month) or are interested in investing should be prepared for a stronger yen, 'Wells Fargo & Co analysts wrote. "
Royal Bank of Canada"I remember the debt ceiling impasse in 2011 and 2013, when I worked at the Fed, and I always said it was the worst, and now I have to admit that the situation is obviously more serious," strategist Blake Gwinn said on Tuesday.