Moody's Investors Service said on Thursday there is a small but rising risk of a short-lived default by the United States if there is no increase in the statutory debt limit in coming weeks.
WAYNE SCHMIDT, CHIEF INVESTMENT OFFICER, GRADIENT INVESTMENTS, ST. PAUL, MINNESOTA:
My hunch is the bond market has pretty well priced in the risk of a downgrade of the U.S. government debt rating at some point here. It's probably just a warning sign from Moody's here to weigh in on that potential. But the bond market is probably fairly well aware and probably has fairly well discounted the likelihood of any type of downgrade on U.S. debt.
I don't know if it's just a little saber-rattling by the ratings agency to get their name out there or something but it's just one of those situations we are going to see how the summer unfolds as we get closer to that debt ceiling and what Washington does and what the ratings agency is doing. But the market is well aware of the risks on both sides.
THOMAS DI GALOMA, MANAGING DIRECTOR OF GOVERNMENT SECURITIES, OPPENHEIMER & CO, NEW YORK:
There is a negative price action occurring because of the recent warning from Moody's.
IRA JERSEY, DIRECTOR OF INTEREST RATE STRATEGY, CREDIT SUISSE, NEW YORK:
Certainly if the debt ceiling is not raised the risk of default goes up, but we see that as highly unlikely and expect it to be raised eventually. We have been saying all along that the probability is near zero and is unthinkable. Nevertheless, the government will do everything it can to pay debt holders. This administration does not want to be the first one to not pay its debt.
A government shutdown will very draconian and not like 1995. In fact it would make 1995 look like a walk in the park as it will not be as severe. At the same time, there is a lot of politics going around and that raises some questions of risk.
ANDREW WILKINSON, SENIOR MARKET ANALYST, INTERACTIVE BROKERS GROUP, GREENWICH, CONNECTICUT.
I think equity investors realize that the chances of a government default are relatively slim and as such, does not pose a threat to corporate earnings.
In the big scheme of things the possibility of a government default is a very negative factor. But in reality is unlikely to happen as lawmakers conclude negotiations on the debt limit.
JOE KINAHAN, CHIEF DERIVATIVES STRATEGIST, TD AMERITRADE, CHICAGO:
It is a small risk and I think Friday's employment number has more probability to move U.S. equities.
Yes the bond market normally leads the stock market in times of crisis but because this is currently a low probability occurrence, the stock market is not as focused on a default possibility.
JOHN BRADY, SENIOR VICE PRESIDENT, MF GLOBAL SECURITIES, CHICAGO:
The actual story by Moody's doesn't really tell us anything new. The market was selling off this morning before the Moody's story and it's going to continue to sell off as traders take away their long positions ahead of tomorrow morning's payrolls number.
The trade of most pain tomorrow is a number that's stronger than expected. Traders are taking chips off the table. They're paid to manage risk, and they're very likely to do that by taking chips off the table, especially at the beginning of the month.
Are you suggesting there's perhaps a little political bias associated with this statement? I think that's possible.
QUINCY KROSBY, MARKET STRATEGIST AT PRUDENTIAL FINANCIAL IN NEWARK, NEW JERSEY:
Ultimately the bond market will respond to whether or not it believes the negotiations are going to be meaningful and viable. Unless there's a sense of crisis... this is just a reminder to Congress that it needs to take this very seriously.
A response in the market is a reflection of what it thinks is going to happen, it doesn't really matter until it matters. And when it does it will be reflected in yields in the bond market and it will be reflected in the equity market. When that day comes, if Congress has not worked out a plan with the administration, it is going to matter.
PAUL DIETRICH, CHIEF EXECUTIVE OFFICER OF FOXHALL CAPITAL MANAGEMENT, ORANGE, CONNECTICUT
In most of our equity portfolios we've increased the portion of commodities and commodity producers from about 10 percent to 16 percent to protect against unseen events like the debt limit not being raised. I think that our politicians will play chicken until the last minute and the political drama will get resolved, but there's going to be a lot of drama until that happens and this today is part of that.
FRED DICKSON, CHIEF MARKET STRATEGIST, D.A. DAVIDSON & CO., LAKE OSWEGO, OREGON:
I regard it as not surprising, and another negative piece of information for U.S. investors to digest. I think there is some consternation in terms of how politicians are going to play out the debt ceiling between now and Aug 2.
We're in a period of above-average volatility, and I think this will probably add to that.
RYAN LARSON, HEAD OF EQUITY TRADING, RBC GLOBAL ASSET MANAGEMENT, CHICAGO
The tone has been set for a couple of weeks now after seeing weak data recently that show the growth is moderating here, if not slowing. It shouldn't come as a major shock but nonetheless, this is a headline-by-headline traded market. If we see a negative headline, then the market will react to it.
WILLIAM LARKIN, FIXED INCOME PORTFOLIO MANAGER, CABOT MONEY MANAGEMENT,
It is way overdue. A key component of the credit rating is the fiscal outlook for the ability of an institution or an organization to pay its debt, so if you are messing around and playing politics with the debt limit it is very rational to say that you are damaging your credibility.
We elect these officials, they should be working together to come up with solutions and be pro-active about it.
KATHY LIEN, DIRECTOR OF CURRENCY RESEARCH AT GFT FOREX, NEW YORK:
Moody's threat to downgrade U.S. debt certainly doesn't help the dollar. Moody's downgrade adds pressure on Congressional leaders to work hard at reaching an agreement to increase the debt ceiling. However with that in mind, Moody's is still lagging behind S&P in their rating actions and threats. Putting a country's rating on review is also not the same as a downgrade. An actual downgrade is still unlikely scenario.
MARKET REACTION: STOCKS: U.S. stock indexes were little changed BONDS: U.S. bond prices added to losses FOREX: The dollar added to gains against the dollar