Law, Interbank and Money Markets News Scan: Counseling my clients to get politicians on code.

The Takeaway: Counseling my clients to get politicians on code.

Yesterday, the U.S. Senate passed HR 1968, a continuing resolution to fund the government through the end of Fiscal Year 2025 but at Fiscal Year 2024 levels for most programs. The big hubba baloo in the media is over what appears to be continued weakness among the Democratic Party. Ten members of the Senate’s Democratic caucus crossed the aisle and voted with Republicans to advance the bill to a vote.

Most watchers of Congress will tell you that voting for cloture and voting to approve a bill itself are two different things. In the case of HR 1968, of the ten Senate Democrats that voted to advance the bill to a vote, two senators, Angus King, Independent of Maine, and Jeanne Shaheen, Democrat of New Hampshire, did vote to approve the funding to keep the government open.

Senator Shaheen was honest about the political game of chicken she felt she had to play. Consider the following:

“Once I had voted for cloture, it was an opportunity to pass the bill, and I thought it was more honest to vote for it,” Shaheen told CNN, adding: “I thought, much as I didn’t like the CR, I thought a government shutdown would be worse and would give Trump and Elon Musk and the DOGE operation more of an opportunity to fire people, to shut down agencies and to close the work of the government.”

A shutdown can have negative impacts on the making of markets. Federal workers spend money and if they are offline, gross domestic product could fall with the decrease in their spending. If IRS employees are not on the job, tax refunds could be delayed further impacting spending. Revenues from park activities could fall off. The release of data sets such as the consumer price index, personal consumption expenditure index and non-farm payrolls may be delayed as well.

The uncertainty that may be transmitted to the markets could also show up in the value of the currency and probably to the credit rating of the United States. The world may ask itself, “Can we trust the soundness of the US dollar?” “Is the US inability to manage its government financial affairs posing a risk to returns on these bonds that I am holding?”

Section 4 of the 14th Amendment of the U.S. Constitution provides that:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

The clause appears to create a solid constitutional basis for providers of liquidity to continue receiving their coupon payments even during a government shutdown, but I would advise strengthening this constitutional platform with a program of political engagement. Liquidity providers need to influence the political environment with a goal of creating stability in the legislative and executive processes. While the populace has become desensitized to the frequent game of chicken with federal spending, the game has a more immediate impact on liquidity providers particularly through interest rates.

According to data from the US Treasury, the two-year ticked up to 4.02% from 3.94% the day before. The ten-year also saw a slight increase from 4.27% to 4.31%, while the 30-year inched up to 4.62% from 4.59% the day before.

I do not believe congressmen appreciate how political risks contribute to counterparty or interest rate risks. While they engage in word salad about maintaining the dollar’s status as a reserve currency while making housing affordable, they are too skilled in pushing the public’s emotional buttons and less aware of America’s role in the global macro yield chasing environment.

This is why it is important that liquidity providers step up their engagement game to keep political actors on code.

Alton Drew

15 March 2025

In need of an advocacy strategy? Contact me at altondrew@altondrew.com.

(Ready for your next trader challenge? Visit https://traderswithedge.com/?r=348)

What I read today

Congress. HR 1968. “Specifically, the bill provides continuing FY2025 appropriations to federal agencies for the remainder of FY2025. It is known as a continuing resolution (CR) and prevents a government shutdown that would otherwise occur if the FY2025 appropriations bills have not been enacted when the existing CR expires on March 14, 2025.” — Congress.gov. 

European Central Bank. Quantitative Easing. “The European Central Bank is launching a fresh strategy assessment seen covering some big questions on the way it works – from whether massive bond buys remain a good policy tool, to what role it should play in the fight against climate change.” — Reuters.

Germany. Debt. “German government bond yields, equities and the euro all rose on Friday on reports Germany’s Chancellor-in-waiting Friedrich Merz had reached an agreement with the Greens to reform debt rules and massively increase state borrowing.” — Reuters.

European Central Bank. Global economy. Trade war. “Stephen Sackur is in Frankfurt for an exclusive interview with Christine Lagarde, president of the European Central Bank. Donald Trump has triggered what could become a global trade war and has prompted European governments to make massive new defence spending commitments. Is the European economy capable of withstanding Trump 2.0?” — BBC.

United Kingdom. Pound sterling. “Sterling lost some ground versus the dollar on Friday after data painted a grim picture of the British economy, and it softened against the euro as prospects of a German debt deal lifted the shared European currency.

The British pound fell as much as 0.25% to $1.2918 before clawing its way back up to $1.2943. But it was still not far off its four-month peak of $1.2990 hit on Wednesday.” — Reuters.

The Data

Administered rates per the Board of Governors of the Federal Reserve System.

Discount Window: 4.50%

Effective Federal Funds Rate: 4.33%

Interest on Reserve Balances: 4.40%

Overnight Reverse Repurchase Facility Rate:4.25%

Reference Rates per the Federal Reserve Bank of New York.

Effective Federal Funds Rate:4.33%
Overnight Bank Funding Rate: 4.33%
Secured Overnight Financing Rate:4.30%
Broad General Collateral Rate:4.29%
Tri-Party General Collateral Rate:4.29%

Foreign exchange rates per the Board of Governors of the Federal Reserve System.

EUR/USD=1.0859
USD/JPY=147.1300

U.S. Treasury rates.

2-yr notes: 4.02%

10-yr notes: 4.31%

30-yr bonds: 4.62%