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Debt and Debate: Let Markets Do Talking on Default Fears

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Will it happen, or will it not? If so, does any of it matter?

When it comes to the nation’s debt and its possible default, these are the questions argued in Washington.

But it’s the market, once again, that might be the best harbinger of things to come.

Damian Paletta, writing in his Washington Wire blog, points to evidence that some investors could be taking note of the political fight and bracing for the worst outcome.

“The price of one year’s worth of insurance against the default of U.S. government bonds has risen from 7 basis points on April 6 to 37 basis points on Tuesday, according to Markit, which tracks prices in fixed-income markets,” Paletta writes. “Investors would buy these bonds to protect themselves – or potentially profit – if the U.S. government does default on its debt and the bond market goes haywire.”

Akin to pleading for homeowners insurance as the hurricane nears, he notes the biggest one-day jump was from May 19 to May 20, when the price skyrocketed from 14 basis points to 22 basis points. Why is that significant, he asks? The government’s debt ceiling was officially reached on May 16, and Treasury Department officials “have been shuffling around assets ever since to avoid a default.”

“Many analysts believe the one-year numbers can be deceiving because the credit default swaps that account for the one-year insurance are thinly traded,” he adds. “A more closely watched CDS is the five year, which has also risen steadily, according to Markit.”

He concludes by noting five-year CDS on U.S. government bonds rose from 37 basis points in April to 54 basis points on Tuesday.


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