(Bloomberg) — State Street Chief Executive Officer Ron O’Hanley warned against betting on a Treasuries rally in the wake of any downgrade of the US credit rating amid the political battle over the debt limit.
(Bloomberg) — State Street Chief Executive Officer Ron O’Hanley warned against betting on a Treasuries rally in the wake of any downgrade of the US credit rating amid the political battle over the debt limit.
Back in 2011, Treasuries still served their traditional role as a haven amid market turmoil in the aftermath of S&P Global Ratings cutting the US rating from AAA. That move had roiled equities and ended up damaging consumer confidence, hurting the economic recovery from the credit crisis.
With House Republicans trying to use the debt ceiling as leverage to force President Joe Biden and congressional Democrats into spending cuts, and the White House refusing to negotiate, there’s another political impasse looming over markets.
The economic backdrop is dramatically different, with the Federal Reserve tightening monetary policy to pull down inflation. And, unlike in 2011, the euro zone isn’t facing a debt crisis undermining confidence in its own government-debt market.
“I’d be much more inclined to believe that Treasuries would do the opposite if that were to happen again,” O’Hanley said in an interview Friday when asked about another debt-rating downgrade scenario.
The head of one of the world’s biggest asset management and custodial firms, O’Hanley noted that “markets are not as liquid as they used to be,” and there’s a risk that market makers would withdraw capital ahead of any debt-limit crisis.
“In the run-up to this, you’d see lots of dislocations in markets — maybe even the Treasury market,” he said. “The challenge of this is you could see a fair amount of damage well before you saw a default.”
The Treasury Department last week began taking extraordinary accounting measures after hitting the debt limit, giving it space for some months before it runs out of cash. Economists and bond-market analysts anticipate the ceiling will have to be raised sometime in the third quarter to avert a US payments default.
“I do take those risks of default” seriously, “because I do believe that there are people that believe that this is the only way they can get their message across,” O’Hanley said.
While not predicting a crisis, O’Hanley worried over the danger of strains in financial markets and interbank lending getting “transmitted relatively easily into the underlying real economy.”
‘Ultimate’ Self-Hurt
How Treasuries would react to a downgrade is subject to debate. For his part, Iain Stealey, chief investment officer for fixed income at JPMorgan Asset Management, sees Treasuries rallying in the event of debt-limit related worries, just as they did in 2011.
“Probably even more so now because you’ve actually got some yield on the 10-year Treasury,” Stealey said on Bloomberg Television Monday. “I definitely think that will be the case and the flight to quality will favor those bonds.”
O’Hanley said that, ultimately, markets work based upon trust. Undermining “the full faith and credit of the US” would be “the ultimate act of self-hurt,” he said.
–With assistance from Jonathan Ferro and Liz Capo McCormick.
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