There are two main reasons why government bonds aren't troubled right now. One is that the market - being a conventional Keynesian - is worrying that the shutdown is depressing economic growth, and weak growth is good for bonds. Such concerns might well be justified. Justin Wolfers and Betsey Stevenson at the University of Pennsylvania point out that the last debt ceiling debate hit consumer confidence hard. And economists at Stanford University show that political uncertainty can depress business investment.
The other reason is that few people actually expect the government to default. The bi-partisan Congressional Budget Office has warned that the special measures the government is using to bypass the debt ceiling will be exhausted by 17 October, and soon afterwards it will exhaust its remaining $30bn of cash reserves, leaving it potentially unable to pay interest on Treasury bonds at the end of the month. Few, however, think it will come to this. "I doubt that anyone thinks that a default will really happen," says Chris Iggo at Axa Investment Managers. Some hope that an agreement to raise the debt ceiling will be reached before then, while others say that the government could cut other spending to pay bond-holders - although postponing military wages or pension payments are hardly pain-free options.
In fact, even if the government fails to pay interest, it might not be bad for bonds. The resulting loss of liquidity and fear for the stability of the financial system might encourage investors to hold bonds rather than equities.
Why, then, do I say this shutdown is a warning of longer-term trouble? Simple. The fact that politicians are unable or unwilling to compromise to make a budget now warns us that they might be unable to solve the US's longer-term budget problem. And this is big. For years, the CBO has been warning that "the budget is on an unsustainable path". This is because government spending relative to GDP will be pushed up by a combination of an ageing population and Baumol's disease, the tendency for costs of some services such as healthcare to rise faster than prices generally. Without big policy changes, says the CBO, deficits will exceed GDP growth, which would put the debt-GDP ratio onto an ever-increasing trajectory.
To prevent this, the US needs either tax rises or spending cuts. And if Congress can't agree on today's relatively small issues, it will not be able to agree on these bigger long-term ones. Worse still, this inability to compromise might reflect not merely poor leadership, which might be solved by a better calibre of politician, but rather fundamental and intractable social and ideological divisions in the nation.
Two things exacerbate this problem. First, the country might not be able to grow its way out of trouble. Robert Gordon of Northwestern University says: "The US faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007".
Secondly, the US will eventually no longer be able to rely upon a global savings glut to hold down bond yields. Economists agree that China is trying to rebalance its economy towards consumption, a process that will probably cause slower growth and lower savings. The flow of money into US Treasuries from the far east could well therefore dry up. That would raise borrowing costs, which would add to the US's fiscal troubles.
This is not a wholly out-of-consensus view; the fact that the US yield curve is upward-sloping means that the market expects bond yields to rise. Nor is it wholly a bad thing. Higher US bond yields would mean higher bond yields around the world, which mean higher annuity rates, so those of you in your 40s shouldn't worry so much about your pension. Nevertheless, the US government - and bond markets - have a long-term problem. And even if the present impasse is resolved, this won't go away.
