Government shutdown is political theatre; don't see US defaulting on debt: JPMorgan

To me, rising bond yields are a sign of strength, not something to worry about, he further mentioned.

Below is the transcript of the interview.

Latha: The Asian markets have not responded very negatively to the US government shutdown. Dow Futures is lower by just 0.1 percent. Will the market be able to take this shutdown in its stride?

A: I think so. As we saw last week, this kind of events are mostly political theatrics. Most of the governments still run because much of it is on automatic. Shutdown affects the discretionary components of the government.

The truth is, when we look at the past and we see moments in the past when these kind of things happened, they really have very limited impact on the economy and the reason is once an agreement is put together, anybody who was not on the job is paid retroactively. So, we never see much of an impact on the economy.

I think the markets must expect that this is going to be resolved one way or the other in the next week or so.

Sonia: The raising of the debt ceiling has been a problem for years and this time around the expectation is that if they don’t get the borrowing authority to raise the debt ceiling then that could lead to some more defaults etc, Would that be a worry for you?       

A: It creates volatility, I don’t think we worry about defaults, it is highly unlikely. The treasury department does have options that they can work through to get past this. However the deadline is approaching and I think as in the past, we will that they will find a way to resolve this because it makes no sense. I don’t think anybody in the position of responsibility is going to be allowing the government to be defaulting. I think we will find short term solutions until they can come up with a longer term solution.

Latha: I just want to know how seriously we should take the rise in US bond yields to 2.66. Will this at some point begin to slowdown the rally in at least emerging markets?

A: I think what we are watching is a response to the improving outlook, not only in the US but all around the world. We and my colleagues keep marking up our growth forecast, so it is a natural outcome that as we see a stronger economy we are getting tax changes here in the US that are boosting a lot of this optimism. It is only natural that you will see bond yields rising. I think for many of us, we don’t view 10-year treasury yields of 2.60 as all that onerous. If anything we tend to look at interest rates as being somewhere on the low side because of what central banks have been doing. So, I think what we are seeing is a gradual response to improving economy which means the market has to start thinking about central banks pulling back from all the asset buying that they were doing.

So, to me rising bond yields in this kind of environment are a sign of strength and not something to worry about.