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 A Reuters analysis, tracking short-term Treasury yields, credit
default swaps and market volatility data, showed traders are
increasingly less likely to respond to repeated ultimatums from
Republicans in the U.S. Congress about the debt limit.
That could spell trouble in the future if politicians see little
market consequence from precipitating an unprecedented default, but
some analysts were doubtful it would come to that.
"The near-death experience we had in 2011 has given us the sense
that we're not going to do that again," said Mark Vitner, senior
economist at Wells Fargo Securities in Charlotte, North Carolina.
"It's taken some of the fear out of the market."
For now, after five years of fighting, the debt limit battles on
Capitol Hill have gone quiet. That's due to a 17-month truce forged
by former U.S. House of Representatives Speaker John Boehner just
before he resigned a few weeks ago.
That has silenced the issue, as Boehner hoped, during the 2016
presidential and congressional election campaigns. But hostilities
could be renewed in mid-March 2017, just as the next U.S. president
will be settling into the White House.
Indeed, some Republican fiscal hawks are itching for another chance
to demand cuts in federal spending as a condition for raising the
debt limit, saying Boehner sold them out.
"Did we get much out of it? No. We got nothing. We did a clean debt
ceiling increase," said Representative David Brat, a Virginia member
of the House Freedom Caucus, a hard-right Republican faction known
for fiscal brinkmanship.
CREDIT DOWNGRADE
The United States is one of few nations worldwide in which the
legislature must approve periodic increases in the legal limit on
how much money the federal government can borrow. Until recent
years, Congress generally rubber-stamped such approvals.
When Republicans started threatening to force a federal default if
their demands for reduced government spending were not met, the goal
was to scare their political rivals. As it turned out, the Democrats
never flinched, but the markets did.
In August 2011, congressional Republicans demanded that the
projected federal budget deficit be cut by $4 trillion over 10 years
or they would not vote to raise the debt limit.
Democrats, defending pet spending programs, resisted. Talks to end
the dispute collapsed and the U.S. Treasury came close to the first
debt default in U.S. history. This was averted by a last-minute deal
that was closely followed by Standard and Poor's decision to cut the
U.S. credit rating below its top tier for the first time.
The episode triggered the highest reading in the CBOE Volatility
Index, sometimes known as the fear index, since the 2008-2009
financial crisis.
In October 2013, when another debt-limit fight coincided with a
17-day government shutdown, the VIX was more muted. Just a month
ago, another episode barely registered on it.
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A similar pattern of declining market impact is evident in yields on
one-month Treasury bills, the debt security most vulnerable to
short-term payments disruptions.
Closing yields, measured in thousandths of a percentage point in
recent years with short-term rates effectively at zero, spiked to
just under two-tenths of a percentage point during the 2011 episode.
They jumped to a third of a point during the 2013 shutdown as
uncertainty reigned, but this year's debt limit debate in late
October saw a rise of only a tenth of a point.
Spikes in the cost of insuring U.S. government debt against default
also moderated with each recurring dispute, even in 2013, for both
one-year and five-year credit default swaps.
RYAN TAKES OVER
Reduced financial market worry about the debt limit has coincided
with increased hesitancy among some Republicans to create standoffs
over the issue, though demand for spending cuts remains high in the
party.
Brat and other fiscal hawks said they expected new House Speaker
Paul Ryan to approach the next debt limit deadline more aggressively
and with more advance planning.
"One of my high hopes for serving under Paul Ryan, is that we're not
going to let these deadlines creep up on us again," said Blake
Farenthold, a conservative Texas Republican.
Ryan in October voted for a bill that would prioritize debt payments
in the event the debt ceiling is not increased, indicating he does
not consider such a scenario unthinkable.
The measure, derided by Democrats as the "Pay China First Act"
because Beijing holds $1.2 trillion in U.S. Treasury debt, drew a
veto threat from the White House, which said the proposal would
force defaults on other obligations, including payments to Medicare
and veterans programs.
Even the few remaining moderate Republicans said there will always
be threats over the debt limit. "I don't think that has gone away,"
said Republican Senator Susan Collins of Maine.
(Editing by Kevin Drawbaugh and James Dalgleish)
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