The historic ouster of Republican Kevin McCarthy as Speaker of the House may add to the risk of a US sovereign credit-rating downgrade and further roil markets, according to strategists.
McCarthy’s exit from the leadership role is likely to set off a bout of political uncertainty in Washington on matters such as federal spending, and brings into focus the potential for government shutdowns as legislators wrangle over budgetary allocations.
Markets reacted, too. Treasuries extended losses in Asia trading Wednesday as McCarthy’s ouster added to jitters about higher-for-longer interest rates and the return of a traditional risk premium for bonds. US bond yields have shot higher this week and strategists say Congress’ power struggle may trigger renewed angst in fixed income.
“There is some risk of a potential downgrade” by Moody’s Investors Service should the change lead to a government shutdown and fuel more uncertainty around the US’ spending plans, said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “These guys haven’t gotten their act together — and it could lead to markets rethinking about pricing in Treasuries.”
Moody’s, the only remaining major agency to give the nation a top rating, said late last month that its confidence in the US is wavering because of concerns about governance.
“The immediate market impact of McCarthy’s ouster is relatively limited as the government is funded through Nov. 17,” Isaac Boltansky and Isabel Bandoroff of BTIG wrote in a note. “The near-term concern is that the House’s paralysis will further complicate the already complicated calculus surrounding the forthcoming funding fight.”
Goldman Sachs Group Inc. said McCarthy’s departure adds to the risk of a government shutdown in November.
The next speaker is likely to be “under even more pressure” than McCarthy was on funding issues, strategists including Jan Hatzius wrote in a note.
And while the impact for investors may be difficult to gauge at such an early point, Scott Solomon, money manager at T. Rowe Price, sees potential for the disruptions to fuel renewed selling in the world’s biggest bond market.
“There’s a path where the government chaos actually leads to higher spending,” said Solomon, who held short positions in 10 and 30-year Treasuries. “That would be likely bearish for yields.”
(Updates with read more box. An earlier version corrected the Y-axis in chart.)
