The Day Ahead: Limited Data Leaves Focus on Debt Ceiling Vote

Strange things are happening in Washington, or at least that's what we're meant to believe.  If the Fiscal Cliff debate was any indication, then we were to expect the debt ceiling debate to go down to the wire.  Key ingredients would include heated, nearly comical political theater in which one side of the party offers a "too little, too late" proposal followed by the other party promptly deriding said proposal as some sort of insulting joke.  Public appearances are a must, and should be so over-the-top that straight faces can barely be held.  Parading middle class voters across the stage as if campaigning is also a viable tactic.

Never say never, but we haven't seen any of that this time around.  Granted, there were scattered grumbles from the left side of the aisle after House Republicans announced they'd be voting on legislation to push the debt ceiling deadline out to May 19th, but they were nothing compared to the Fiscal Cliff rhetoric.  

Apart from that, this round of fiscal politics represents an utter sea-change from the last.  Pre-announced visits to the podium have been scarce and generally non-inflammatory.  Leaders have drafted legislation well in advance of any actual deadline.  The Republican party has ostensibly given up using the debt ceiling to more quickly force Democrats' hands on spending cuts.  By pushing out the deadline, they've effectively addressed the president's main debt-ceiling talking point regarding "paying the bills we've already incurred."  Now the GOP can say they did this, without being asked twice, thus legitimizing the still-attached imperative to lower spending and for the Senate to create a budget.

All of the above is, dare we say, sensible?!  Surely, there would be backlash from the White House, calling attention to the shortcomings of the legislation set to be voted-on today, right?  Far from it!  Seriously... Although White House Spokesman Jay Carney did say the administration would prefer to tackle the debt-ceiling in one straight shot versus incremental steps, the rest of the reaction was anything but backlash.  Carney even said "What happened was a very significant development in terms of de-escalating the sense of conflict."

Wait, what?!  One political party did something that was both earlier than expected AND seemingly sober/sensible.  Then the other party PRAISES it?!  No backlash?  No theater?  No Drama?  Washington!  Where have you gone?!  It almost seems too easy.  Things almost seem too amicable out of Washington.  It's unsettling... to go from vitriolic contempt last month to sensibly agreeing the next.  Some deeper story is playing out, and perhaps it's as simple as the GOP seeing the olive branch as the best way to accomplish their goals.

We'll have to see how today's vote goes over with markets and with the Senate especially.  Obama's statement today about not planning on "standing in the way" of the bill becoming law seems to be saying something other than "I hope they send me that bill quickly and I will sign it so we can get down to business."  The bottom line is that the current forces contributing to a generally "rising rate environment," would be clearly reinforced if Washington is seen making progress in as sensible and expedient a manner as currently seems to be the case.

Yes, there's a major caveat in defining "expediency" as a very RELATIVE thing (of course, this was all supposed to have been handled already, so we'll say "relative to prevailing expectations"), but the mere persistence of stagnant growth at home and abroad isn't enough to keep 10yr yields under 2%.  There's a panic/uncertainty premium baked in to the current rates cake, and the same recipe yielded only 2.06% at its MOST PANICKED moments before the onset of the global, political uncertainty.  Hugely successful Spanish debt auctions (which we had yesterday) with 60% foreign sponsorship and smooth sailing legislation in Washington regarding the Debt Ceiling (we'll see how it goes, of course) are the first hints of confirmation that the rising rates environment won't quietly turn around and spend another 6 months trading between 1.5 and 1.8 in 10yr yields.

That's not to say the broader range doesn't allow for a revisit to, say, 1.6's on the lower end, but if 10's were to fall that low in coming months and bounce higher again, the trajectory of "the great unwinding" would be all but wholly confirmed.  With all that grandiosity at stake, today's focus is on the Debt-Ceiling vote, with FHFA Home Prices at 10am merely being "interesting."