The market has largely shrugged after previous government shutdowns, but this time it could prove different if it shows that the incompetence of US governments has fallen to a new low. This could lead to rating agencies reconsidering our high-credit but vulnerable state. The Labor Bureau said Monday it had prepared a contingency plan for what would be the equivalent of a news and data blackout if the U.S. government shuts down, indicating that the Trump administration is preparing for the worst. In May, Moody’s downgraded the US credit rating to AA1 from the highest possible AAA level. At the time, Moody’s warned that further valuation cuts could be promoted if political issues had serious economic impacts. “If policy effectiveness or institutional strength is eroded to a degree that substantially weakens the sovereign credit profile, the rating could be downgraded,” Moody’s wrote. The agency said such incidents include “economic resilience to medium-term growth degradation or shock” or significant moves from the US dollar. A possible move in US credit ratings has led JPMorgan’s trading desk to warn clients of “tail risk” Monday morning if the government closes this week. Another cut in credit ratings as a result of the closure could hurt the US treasury and send higher yields. “We will not end the Finance Follies,” President Donald Trump is convening the Supreme Leader of Congress to sign a contract before Wednesday’s deadline. He warned of mass shootings by federal employees if the shutdown is not avoided. Data from recent history shows that markets have generally ruled out government closures. Some market participants have already wondered whether the government closure could look different this time due to fractures in political situations and national economic health. US10Y YTD MOUNTAIN 10 Years Treasury, so far, bond traders and economists don’t seem overly concerned about risk, but that’s on their radar. FWDBONDS Chief Economist Chris Rupkey said the downgrade will be something like a “technology” in the financial market that has already shown resilience in the wake of previous cuts and concerns about national debt. Bond traders also hope that Treasury Secretary Scott Bescent will “step in” if something is much surprised, he said. Additionally, RSM chief economist Joe Brusuelas said downgrades to credit ratings were not a result from the start. Meanwhile, he said that if the closure does not resolve immediately, it could hope for a reduction in U.S. employment and business investment. “My feeling is that the market risk around another government closure is minimal,” Bruseras said. “Market participants are conditioned on financial follies that don’t end in Washington.”
