Debt ceiling dynamics are bond bullish
By Warren Mosler
Here’s my take:
A. They get a few trillion in long term cuts and maybe a few that kick in reasonably soon and extend the debt ceiling
This would help ensure aggregate demand stays low for long, which is bond friendly, and stocks muddle through in a range with slowing earnings growth but just enough top line growth to stay positive.
B. They don’t extend the debt ceiling
This would immediately and directly reduce aggregate demand, which is very bond friendly and very bad for stocks, as many top lines go negative until federal spending is restored.
And either way the economy remains vulnerable to looming external shocks, including a China slowdown, euro zone default and/or slowdown, UK slowdown, and a strong dollar.
Cross-posted from Center of the Universe.
Longer term austerity or government spending cuts, will be bad for bonds as a weaker economy means that the debt burden rises and means that ultimately expect haircuts. Look at Ireland and Greece for examples.