U.S. Government Shutdown Credit Negative, No Current Risk to AAA Rating – Moody’s

Investing.com – The current government shutdown is a credit negative for the U.S. due to its disruption to the American economy, although it will have no immediate implications for the country’s triple-A rating, Moody’s noted in a report released on Sunday afternoon.

The U.S. government shutdown on Monday after Democrats and Republicans failed to reach a deal Sunday night to fund government operations amid a bitter dispute over immigration and border security.

Senate Majority Leader Mitch McConnell said that an overnight vote on a measure to fund government operations through Feb. 8 was canceled and would instead be held at 12:00PM ET (17:00 GMT) on Monday, but uncertainty remained over whether it had enough votes to pass.

The credit agency noted that the shutdown halts federal discretionary spending, which accounts for about 38% of total non-interest federal spending and includes most day-to-day government operations.

However, spending on mandatory programs, such as Social Security, Medicare, Medicaid and other social programs, will continue, as will principal and interest payments on US government debt.

“Although the shutdown will be credit negative for the sovereign to the extent that it disrupts the U.S. economy, it will not have any immediate implications for the U.S. government’s credit rating,” Moody’s affirmed.

Meanwhile, Moody’s Analytics chief economist Mark Zandi compared the possible impact to the last government shutdown in 2013 that lasted 16 days and had an estimated reduction to U.S. gross domestic product of 0.3% and suggested that the effect this time around, even if lasting as long, would likely be less.

“It’s a hit, but it’s a digestible hit,” Zandi indicated.

“The economy is so strong right now, it’d take a lot to derail it,” he explained.

Stocks likely to escape unscathed, Treasuries continue to wallow

Zandi also noted that the issue in 2013 was one of confidence due to uncertainty, but, as U.S. stocks at record highs clearly shows, “Sentiment now is as strong as it gets.”

Regardless, investors in stocks tend to look past the government shutdown as a “temporary” factor. During the 16 days that the government was shut down in 2013, the actually rose 3.1%.

Meanwhile, the selloff in U.S. government bonds continued on Monday with the yield on 10-year Treasury notes, which move inversely to bond prices, rising to levels not seen since May 2014. U.S. bond yields have been on the rise on expectations that the Federal Reserve will continued to tighten monetary policy in the face of positive economic growth stateside and market participants expected the government to increase debt issuance in order to finance the U.S. widening budget deficit, particularly ahead of President Donald Trump’s $1 trillion infrastructure plan. The 10-year yield was last up 0.28% at 2.646%, off an intraday high of 2.672%.

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