Even as US officials issue dark warnings of financial catastrophe if Washington's debt limit is not raised by August 2, bond markets have stayed calm, with traders shrugging off the news.
The bond market has remained placid despite the drama in Washington because of a widespread belief that Democrats and Republicans will ultimately settle their differences, investors and analysts said.
“It's taking it very calmly. I think it's a fait accompli within the bond market that there will be a resolution,” Richard Schlanger, a portfolio manager for Pioneer Investments in Boston, told AFP.
“No one wants to think of the ramifications and the unintended consequences if there is a default,” he added.
Yields on US Treasury bonds, which should rise if investors begin to doubt the government's ability to repay its debt, instead remain close to historic lows.
The yield on the 10-year Treasury bond was 3.15 percent late on Thursday, not far above its all-time low of 2.04 percent in December 2008 and far below its average over the past 30 years of about 6.76 percent.
And the market's behavior suggests that investors still regard Treasuries as a safe-haven investment, flocking to the security of US government debt whenever uncertainty hits the global economy.
US President Barack Obama has warned that Congress must vote to raise the debt ceiling by August 2 to avoid a catastrophic default.
But Republicans in Congress have refused to raise the debt limit unless the move is accompanied by deep spending cuts.
Democrats have agreed to significant cuts but also want tax increases for some individuals and businesses, which Republicans oppose Ä leading to deadlock on Capitol Hill.
“If a deal to lower the trajectory of debt isn't reached by August 2, we are being told that America could enter into default,” said Michael Pento, senior economist at Euro Pacific Capital.
“But you wouldn't know it from looking at the bond market. It seems that everyone is convinced the US will never renege on her obligations and that the Democrats and Republicans will come to an agreement with time to spare.”
Some observers have detected signs that the markets are quietly reacting to the debt-ceiling standoff.
For instance, prices of credit-default swaps on Treasuries - essentially an insurance policy against a default Ä have edged up in recent months.
And the uncertainty has impacted long-term government bonds as their yields have risen higher relative to those on short-term debt, said Chirag Mirani, a fixed income strategist at Barclays Capital.
“The market is certainly pricing in some risk premium in the long end. The stories change every day, so I think there's some uncertainty which way things are headed,” Mirani said.
“People are nervous in taking on a position either way,” he added.
There is a high probability that Congress will reach agreement with time to spare, economists at Nomura said in a report published Thursday, putting the odds of a dangerous “cliffhanger scenario” at less than five percent.
However, Nomura warns, “As we approach the deadline for the US debt ceiling, the increased focus on it by the press and market participants could unsettle markets depending on how events unfold.”
All three major ratings agencies - Standard & Poor's, Moody's and Fitch - have warned the United States will lose its top-notch credit rating if it fails to pay off maturing debt or make interest payments in the days after August 2.
Such a move could have deeply damaging effects on the government's ability to borrow, as Portugal discovered when Moody's downgraded it to junk status earlier this week.
Adding to the uncertainty, there is debate about whether August 2 is a strict deadline. Some say the Treasury could find various maneuvers to make payments, pushing off the true deadline.
Fitch said it could place a negative rating watch warning on US debt if a deal is not achieved on time, and it might then lower its rating on a specific $30 billion in Treasury bills due for repayment August 4.
But the real test will be the August 15 date for $25 billion in coupon payments due on some $1 trillion of bonds.
If the US can't pay that on time, its sovereign rating could take a hit - and its cost of borrowing would rise.
Schlanger of Pioneer Investments says the real deadline is August 5 - the last workday before Congress is scheduled to go on vacation.
“I think that's more pressing to them than the arbitrary August 2 drop-dead date,” he said. - Sapa-AFP