Continuation of the U.S. government shutdown could have negative implications for the U.S. bond market.
Although it poses no immediate threat to the credit rating of the U.S. government, a protracted shutdown could cause “liquidity strains” for entities that rely on federal money for their revenues or debt servicing, according to Moody’s Investors Service. These include certain municipal bond issuers, defense services contractors and systems that rely heavily on federal funding, such as the New Jersey Transit Corp.
The shutdown is already affecting operating and capital funding for NJ Transit, and that situation will worsen if it extends into February, according to Moody’s.
To date, the shutdown has had little impact on major defense and aerospace contractors because Congress has approved appropriations for the Defense Department for fiscal 2019, but contractors working for agencies that have not been funded, such as NASA and the State Department, are likely to be affected.
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They will not be paid for working while the shutdown continues, and they will lose revenue while projects are delayed or if they’re eliminated.
“Companies with relatively small scale are most at risk, including Constellis Holdings LLC, PAE Holding Corporation (B3 stable) and Salient CRGT — all three rated B3 stable — KeyW Corporation and Guidehouse LLP — both rate B2 stable, and Peraton Corp, rated B3 negative,” according to Moody’s.
The effects of the shutdown on the broader U.S. economy will depend on how long it lasts. Moody’s Analytics estimates that U.S. GDP could lose $8.7 billion if the shutdown continues until the end of this month, shaving 0.2 percentage points off of first-quarter GDP growth. If it continues into February the impact would be greater, exacerbating recent softness in business and consumer confidence and possibly triggering a negative reaction in financial markets.
The shutdown is already disrupting permitting and environmental reviews, import and export license processing, initial public offering application reviews and loans to small businesses and homeowners.