No panic yet on Wall Street

Wall Street is showing few signs so far that it is fearing the financial panic it has been predicting should the government default on its debt.
By · 9 Oct 2013
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9 Oct 2013
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Wall Street is showing few signs so far that it is fearing the financial panic it has been predicting should the government default on its debt.

The fiscal impasse in Washington continued to weigh on stock prices on Monday, as the market's "fear gauge," the CBOE volatility index, jumped 15.95 per cent to its highest level since June. Still, the market reaction to date has been muted compared with past crises.

"We all tell ourselves, 'This is something that is not going to happen'," the head of fixed income trading at Williams Capital, David Coard, said. "This would be like a black swan event - it's not something that you would have thought the US could do in a million years."

But the relative calm on Wall Street is worrying some investors, who fear the markets will not signal to politicians the true danger of hitting the debt ceiling until it is too late.

"The markets are sending this complacent message, and I think the politicians are interpreting it incorrectly and they have no sense of urgency," the owner of hedge fund firm Seabreeze Partners, Douglas Kass, said.

There are signs the nervousness on trading desks is growing as the nation draws closer to October 17, when the US Treasury has said it will run out of emergency measures to borrow more money. Soon afterwards, the government could run out of money to make payments on its bonds - the dreaded default that has Washington buzzing.

Many strategists are watching how much investors are willing to pay for Treasury bills that fall due in the days immediately after October 17. Normally, as the due date for a bill draws closer, they become cheaper. Now though, the bills are getting much more expensive as investors question whether the government will be able to pay them off.

Another barometer of stress is the price of insurance contracts or credit default swaps on Treasury bonds. The cost of buying protection against losses has more than doubled in the past two weeks. Still, the price of swaps is far from where it was in the summer of 2011, when politicians last allowed the country to approach its borrowing limit.

"If the market really believed there was a high probability of default, you would see a much more negative reaction," said Donald Ellenberger, Federated Investors.

The small moves in the sharemarket reflect in part the time that politicians still have to come up with some sort of agreement. In the summer of 2011, it was only 11 days before the final deadline that markets began sliding. The S&P 500 ultimately fell about 17 per cent. With each passing day this time around, pessimism is likely to grow.

But many investors learnt from the 2011 crisis, and the budget stand-off at the end of last year, that Congress can find a way to compromise at the last minute, and are expecting a repeat performance.

"We've seen this movie before, we know how it's going to end," Mr Ellenberger said.
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