Gold bulls stick to the 1750 mark, and the US debt ceiling has not aroused concerns from rating agencies

On Wednesday (October 6), driven by the continuous surge in US Treasury yields, the price of gold fell for the second consecutive trading day, but the bulls still tried to hold the 1750 mark. Market sentiment is low, but expectations of the Fed's reduction of bond purchase plans and stronger US data support the yields of US Treasury bonds. Until the key employment data is released, the market remains cautious. At the same time, as the deadline for the U.S. debt ceiling is approaching, the gold shorts dare not take it lightly.

U.S. Treasury yields and higher U.S. dollar pressure gold prices

This week, U.S. Treasury yields resumed their upward trend since the end of September, when the Federal Reserve stated that it would begin to reduce the scale of monthly bond purchases before the end of 2021. During the day, the yield on the benchmark 10-year US Treasury bond once soared to 1.571%, the highest level in three and a half months. Coupled with rising bets on the Fed’s 2022 interest rate hike, it supported the U.S. dollar and put additional pressure on U.S. dollar-denominated gold.

Driven by rising U.S. bond yields and optimistic economic data, the U.S. dollar index has also maintained the rebounding momentum of the previous day, close to 94.05. As of press time, it has risen by 0.27%.

However, concerns that the continued surge in crude oil energy prices will push up inflation and undermine the recovery of the global economy has weakened investor interest in high-risk assets. This can be seen from the general weakness of the stock market, which may support the traditional safe-haven asset gold. This makes gold bears remain cautious.

On the other hand, market sentiment has recently weakened slightly, anxiety about the US stimulus plan and the extension of the debt ceiling, and the cautious sentiment before the US non-agricultural employment report on Friday. Investors may also be reluctant to bet heavily before the release of the much-watched US monthly employment report. Despite the Republican veto, US President Biden still decided to resolve key budget and rescue plan issues before the October 18 deadline. According to reports, Biden recently stated: "It is practicable to get rid of the obstruction of the debt ceiling."

Congress needs to take action to avoid US debt default, but the rating agencies are not too worried

These days, the biggest tail risk facing the market and the economy is Congress’s showdown on raising the US debt ceiling. A default will severely impact investor confidence, increase the cost of borrowing for the entire economy, and cause the credit rating of U.S. Treasuries to be downgraded. But for now, credit rating agencies seem to be optimistic about Congress’ ability to pass resolutions before the critical deadline of less than two weeks.

The debt ceiling limits the U.S. Treasury's ceiling for funding federal government expenditures (currently about $28.4 trillion), which exceeds tax revenue. The U.S. Treasury Secretary Yellen has designated October 18 as a date for his department to exhaust "special measures". These measures can be taken to satisfy the government's debt without issuing more debt. Congress needs to raise or suspend the debt ceiling first to make it possible.

If no resolution is reached on October 18, the result will be an unprecedented default on sovereign debt in the United States. In 2011, Congress took action on the debt ceiling two days before the Treasury Department’s solvency was exhausted. This was so close to default that Standard & Poor’s, one of the three major credit rating companies, subsequently lowered the credit rating of the US federal government from AAA to AA+. In 2013, Fitch put US Treasury bonds on the negative watch list and finally maintained its rating at AAA.

Standard & Poor's continues to maintain an AA+ rating and stable outlook on US sovereign debt. At present, the credit rating company does not believe that the United States will really default this month, only that it will be close to the edge of default. The situation is still under the control of politicians, partisanship can be overcome, and a financial crisis or economic collapse may cause a country to be unable to pay its bills.

S&P U.S. Sovereign Ratings analyst Joydeep Mukherji said last week: “The cyclical political deadlock surrounding the debt ceiling and the uncertainty of avoiding government shutdowns may damage public confidence and may cause damage to domestic and global financial markets. Serious impact. However, these issues can also be quickly resolved by the country’s political leadership, as has been the case so far, because these uncertainties reflect political manipulation and calculations rather than potential economic difficulties. We are currently concerned about The rating of the United States shows that we expect Congress to resolve the debt ceiling in a timely manner, either raising the debt ceiling or suspending the debt ceiling. "

Fitch Ratings recently warned that even if the US Treasury Department can continue to pay debt interest in a timely manner after the "x date" by delaying other payments, this will still damage its current AAA rating. Since July 2020, the company has always had a negative outlook on US debt.

Fitch’s Senior Director of Sovereign State Affairs Seville said: “The economic impact of debt priority and the potential damage to investors’ confidence in the United States may lead to a possible inconsistency of US credit with the'AAA' rating.” Like general, Fitch believes that the current congressional impasse on the debt ceiling will be resolved in time to avoid default. Moody's has not recently commented on its US credit rating. The current rating is AAA, and the outlook is stable.

It is worth mentioning that after the strengthening of the U.S. Purchasing Managers Index (PMI) and the hard-line comments of the Fed’s policymakers, the rumors of the Fed’s reduction in bond purchases have been strengthened, which in turn supports the yield of U.S. Treasury bonds and also gives gold prices. Brings pressure. However, if there is any headwind in Washington’s settlement of the debt ceiling, the impact on the economy will be huge. At the same time, market participants will pay close attention to the risk catalysts and changes in US employment in September ADP, and look for new stimulus factors before the release of the US Non-Farm Employment Report (NFP) on Friday.


(Spot gold daily chart)

At 15:45 on October 6, GMT+8, spot gold was quoted at US$1750.31 per ounce.