Draghi Won’t Taper?
The bond market gives us a picture of what investors are expecting from policy makers. The chart below shows the bond spreads the riskier European countries are trading at compared to the German Bund. The spreads of these countries, formerly known as the PIGS, have been tightening in the past few months. This buying might be coming from the ECB itself or it might be a signal of the ‘risk on’ trade. In terms of policy, this tightening of spreads forecasts that Draghi won’t taper anytime soon. It will be important to watch these spreads in the coming weeks as we get closer to the ECB’s decision on whether/how much it decides to taper its 60 billion euro per month bond buying program in January 2018.
Debt Ceiling & Healthcare Vote
In terms of American policy, the Treasury bill market helps us understand where the debt ceiling debate is forecasted to go. The market expects the debt ceiling to be hit on October 26th. As you can see from the chart below, this has caused the Treasury bill market to invert as the 3-month bills include the period where the discussion will be heated. The latest prices are a 1.12% yield on the 6-month bill and a 1.17% yield on the 3-month bill. That’s a 5 basis point inversion as it looks more likely that a stress period will result before the ceiling is raised. Congress goes on vacation in August which means the deal will be done in September or October.
The Senate isn’t focused on the debt ceiling as it’s preoccupied with getting something done on healthcare. It was dealt a large blow last week as many of the GOP’s provisions weren’t allowed to be included under a budget reconciliation which needs 50 votes instead of the normal 60. The most important parts which were disallowed by the parliamentarian were 2 provisions to stabilize the insurance market and the rule where consumers must wait 6 months before buying insurance after a break in coverage to prevent people from only buying insurance when they get sick. The latest news is that the Senate will hold a vote on Tuesday on whether to proceed with the motion on the House’s healthcare bill. Whether this passes might depend on if John McCain is healthy enough to attend it.
