Wall Street Nervous as Threat of Government Shutdown Looms

Wall Street is preparing for the potential downfall of the U.S. government's coveted AAA credit ratings. With the recent end of Republican Rep. Kevin McCarthy's short-lived run as House Speaker, there is growing concern that another government shutdown may be on the horizon, possibly as early as mid-November. This unease raises doubts about the U.S.'s ability to maintain its unblemished credit ratings, which are a crucial measure of trustworthiness on a global scale. Additionally, it could further destabilize the $25 trillion U.S. Treasury market, as yields have recently reached a 16-year high.

Moody's expressed concern in late September over the possibility of a government shutdown, calling it a credit negative for the U.S. sovereign. The rating agency also highlighted worries about increasing political polarization and less robust fiscal policymaking compared to AAA-rated countries like Germany and Canada.

McCarthy's removal from office raises a red flag as he had relied on House Democrats to pass a temporary funding measure to prevent a partial government shutdown. However, this "continuing resolution" can only provide a short-term solution.

Amar Reganti, a fixed-income strategist for Hartford Funds, noted that Moody's warning prior to the stopgap funding measure echoed language used by S&P Global in its downgrade a decade ago. This may indicate that Moody's is prepared to downgrade the U.S. if a shutdown occurs, putting the coveted AAA rating at risk.

Reganti further explained that Moody's and S&P Global seem to be less concerned about the sustainability of U.S. debt, which has now exceeded $33 trillion, and more focused on dysfunction in the decision-making process of elected officials.

S&P Global had previously stated in 2011 that policymaking in the U.S. was becoming "less stable, less effective, and less predictable" than previously believed.

Both rating agencies declined to comment on the potential impact of the recent turmoil in Washington on U.S. credit ratings. However, as of March, S&P Global had affirmed the U.S.'s credit rating at AA+ with a stable outlook.

The Impact of Political Chaos on Credit Ratings and the Treasury Yield

Not all credit-rating firms have remained silent on the recent political turmoil in Washington. Richard Francis, co-head of Americas sovereigns at Fitch Ratings, expressed concern about the ousting of the House speaker after the continuing resolution was agreed upon. He expects the political brinkmanship around government-funding negotiations to remain tense, potentially leading to a shutdown later this year.

Francis highlights that Congress has failed to pass any of its 12 appropriations bills, leading to stark disagreements within the House of Representatives and between the House and the Senate.

Despite these concerns, Francis does not anticipate any immediate effect on Fitch's AA+ ratings for the U.S. or its stable outlook.

Walid Koudmani, chief market analyst at XTB, suggests that another credit rating cut for the U.S. may be on the horizon given the recent Fitch downgrade. However, he acknowledges that events seem to be leading in that direction.

While credit ratings are significant, the impact of U.S. debt on global financial markets may be even more substantial. The extensive presence of U.S. debt in the financial system is undeniable. Even with a potential third downgrade, the market's memory of it is likely to be short-lived.

The recent sharp rise in the 10-year Treasury yield has been attributed to a repricing in the world's largest bond market. This repricing follows the Federal Reserve's indication in September that interest rates could remain higher than previously expected. Currently, all eyes are on the 5% level for the 10-year Treasury yield.

It is crucial to monitor how political chaos in Washington and potential credit rating changes might impact the Treasury yield and global financial markets.