Various proposals for resolving the debt ceiling crisis in the current debate have included short-term extensions of the debt ceiling. House Republicans, in one proposal, called for resetting the deadline on default to late November.
The Wall Street Journal reported Tuesday that market analysts are favoring a long-term deal -- the longer the better.
"In the near-term, any budget agreement would be viewed as a positive. But if the best Washington can do is a series of short-term extensions, there will be an economic price to be paid," said Russ Koesterich, global chief investment strategist at BlackRock Inc.
"The quicker the government opens back up, and the longer the debt ceiling is extended, the better the rally," said Alan Gayle, a senior investment strategist at RidgeWorth Investments.
Economic leaders, including U.S. Treasury Secretary Jacob Lew said in recent weeks that even the threat of default would be enough to rattle investors, so that even flirting with the deadline of Oct. 17 would be harmful to the U.S. recovery.
Investors, including banks, are already reacting by pulling back on short-term debt that matures generally in 30 days or less, the Journal said.
Sources told the newspaper that Citigroup is steering clients away from using short-term debt as collateral for loans. That's a fairly direct way for a bank to say they consider short-term bonds too risky.
State Street Corp. has been discussing new rules for collateral it will accept, the Journal said. A bank spokesman said no policy changes have been announced.
The last time the debt ceiling debate overtook Washington was the summer of 2011. Lawmakers went past the deadline for an accord, but reached one the next day with the Treasury Department saying it would do some juggling -- and, arguably, some sweating -- to get the bills paid on time.
Credit rating agency S&P then downgraded the U.S. credit rating -- a first among major rating companies -- tarnishing an otherwise sterling track record.
The other major ratings firms, Moody's Investors Service and Fitch's left the U.S. rating at the top AAA rating.
Then, perhaps illogically, yields for long-term U.S. bonds went down. The reason, it was said, was that even tarnished U.S. bonds were the among the world's safest investments.
Federal Reserve Bank of New York data shows banks have been fleeing short-term debt positions in recent trades, dropping their holdings by 50 percent. And, oddly, U.S. notes due in 30 days are now carrying yields higher than debt that matures in six-months, on the face of it a sign investors fear of default includes the concept that it would be a short-term situation.
"It is not about the inability of the U.S. to pay the bills. It is the political dysfunction that is the problem," said Kenneth Silliman, the head of short-term rates trading at TD Securities Inc. in New York.
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