The latest noises from Washington suggest that politicians are close to reaching a compromise on a deal that will raise the debt ceiling ahead of Tuesday night, thereby preventing a debt default and a government shutdown. This might prompt a short-lived relief rally in risk assets. However, the reported size of the deficit reduction package is very unlikely to prevent America from losing its AAA credit rating. The only question is therefore whether S&P and the other rating agencies pull the trigger this week or wait a little longer. Either way, though, we stand by our long-held view that 10-year Treasury yields will fall to 2.5% by the end of the year and stay there for some time.
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