The Markets News and Analysis Blog – Jonathon Burton

Published October 16, 2013, 5:53 PM

There they go again. U.S. lawmakers brought America to the brink of default before working up a last-minute deal on Wednesday to keep  the government running for, oh, another 13 weeks or so. The congressional gang that couldn’t spend straight sure knows how to kick the can squarely down the road.

The irony is that obstinate elected officials might be just what bond investors need to avoid their own painful debt dilemma.

The Senate deal funds the government until Jan. 15, and extends the country’s borrowing ability – the debt ceiling – until Feb. 15.

Then it’s deja-vu all over again. To be sure, Congress is supposed to ink a long-term budget plan before Dec. 13 — but how much full faith and credit can anyone have in that?

U.S. stocks and bonds rallied sharply on the budget news, and late Wednesday House Speaker John Boehner told an Ohio radio station that House Republicans won’t block the Senate plan. “We fought the good fight, we just didn’t win,” he said.

Truth is, in this fight nobody won. The federal government shutdown and the debt debacle has damaged consumer and corporate confidence. Already Washington’s wobbling has some analysts pegging 2013 U.S. growth estimates closer to 2% than their pre-debt crisis forecast of 2.5%-3%. That’s not a trivial revision.

“The economy has been picking up, and what we don’t know is how much the goofiness in Washington has reversed that,” says Paul Nolte, managing partner at Chicago investment firm Dearborn Partners.

We’ll find out soon enough – once employment and other crucial economic data starts trickling in. The latest Federal Reserve survey, known as the Beige Book, suggests that growth is slowing in parts of the country, and includes the first week of the shutdown.

All of which is highly encouraging for U.S. bond investors.

How can something that tarnishes Main Street America have a silver lining for bonds? Because the shutdown and the debt-ceiling debacle has delivered a one-two punch to the economy.

“Bonds do well when the economy doesn’t,” says Jeff Rosenberg, BlackRock’s chief investment strategist for fixed income. He suggests that bond investors focus on high-quality issues at this juncture.

Safe, highly regarded bonds with intermediate- to longer-term maturities — such as the benchmark 10-year Treasury and the debt of cash-rich, top-drawer companies — tend to outperform in such environments, while lower-tier, highly leveraged corporate credits are more vulnerable.

With growth in jeopardy, the Federal Reserve is unlikely to trim the amount of monthly asset purchases it’s been making to collar interest rates and juice the economy.

This leaves Dearborn’s Nolte with the clear impression that the Fed will delay its asset-purchase “taper” until this March and maybe even mid-2014 — and he’s hardly a lone voice. Given such uncertainty, yields are likely to stay low for longer than investors had anticipated, putting a floor under high-quality bonds and perhaps offering appreciation potential.

That is, until taper talk — and taper tantrums — start again.

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http://blogs.marketwatch.com/thetell/2013/10/16/why-bond-investors-dont-hate-congress/