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How the Shutdown Hurts the US Bond Market

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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.

(Related: Sheila Bair Warns About Low-Quality Corporate Debt)

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.

“The longer these interruptions continue, the more we expect delays in transportation and energy projects, disruptions in trade and hindered investment activity,” according to Moody’s. The housing market, which was already softening before the shutdown, could be affected by the disruption of federal housing programs and suspension of income verification services for mortgage applicants.

(Related: 10 States Hit Hardest by the Government Shutdown)

In the meantime roughly 800,000 federal workers are furloughed or working without pay. They may get paid once the shutdown ends — they have in past shutdowns — but there’s no guarantee of that. Contractors, in contrast, won’t get paid for work they haven’t been able to do. “Many low-wage private contractors including food service workers and security guards likely will not and face a permanent loss of income,” according to Moody’s.

Cities and towns with high concentrations of federal workers, such as the Washington, D.C. metropolitan area, will be hardest hit. Many are already losing sales tax revenue due to slower sales by retailers and food service companies due to spending cutbacks by unpaid federal workers and contractors.

A continued shutdown would also spread to consumer and residential mortgage asset-backed securities because some cash-strapped federal employees can’t make their loan payments. The impact would be limited, however, because “lenders are likely to implement temporary relief programs such as forbearance until the borrowers receive back pay, “ according to Moody’s.

On Friday the Federal Deposit Insurance Corp., Federal Reserve, Office of the Comptroller of the Currency, National Credit Union Administration and Consumer Financial Protection Bureau released a joint statement encouraging financial institutions to work with customers impacted by the government shutdown.

“Affected borrowers may face a temporary hardship in making payments on financial obligations such as mortgages, student loans, car loans, credit cards, and other debt,” according to a letter the FDIC release to the banking institutions it supervises. “These efforts may include extending new credit, waiving fees, easing credit card limits, allowing customers to defer or skip payments, modify terms on existing loans, and delaying the submission of delinquency notices to credit bureaus.”

The letter also notes that efforts to meet customers’ financial needs during the shutdown “should not be subject to examiner criticism.”


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