No panic yet on Wall Street
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.
Frequently Asked Questions about this Article…
So far Wall Street has been relatively calm: stock moves have been muted even as the fiscal impasse weighs on markets. The CBOE volatility index jumped about 15.95% to its highest level since June, signalling rising nervousness, but overall market reaction has been much smaller than in past crises.
A VIX jump — the article notes a 15.95% rise to the highest level since June — means traders are paying more for protection and expecting more near‑term volatility. For everyday investors it’s a signal that market uncertainty is increasing, even if stock moves remain relatively muted.
Investors are paying more for Treasury bills that mature immediately after October 17 because the US Treasury has warned it will run out of emergency borrowing measures around that date, so buyers are questioning whether the government will be able to make payments — an unusual situation since bills normally get cheaper as maturity approaches.
The price of credit default swaps — insurance against losses on Treasury bonds — has more than doubled in the past two weeks, showing rising concern about default risk. However, swap costs remain well below levels seen in the 2011 debt scare.
Some investors fear the market’s relative calm could send a complacent message to politicians, reducing urgency to reach a deal. As hedge‑fund owner Douglas Kass put it, politicians may misinterpret muted markets and not appreciate the real danger of hitting the debt ceiling until it’s too late.
In 2011 markets began sliding about 11 days before the final deadline and the S&P 500 ultimately fell roughly 17%. That episode is a reminder that market stress can accelerate quickly as deadlines approach, which many investors are watching for this time around.
Keep an eye on the VIX (volatility), pricing of short‑dated Treasury bills that mature just after October 17, and the cost of credit default swaps on Treasuries — the article highlights all three as key barometers of stress as the deadline nears.
The article’s tone is cautious rather than panic‑driven: markets are not yet reacting as severely as in past crises and many investors expect a last‑minute compromise, but nervousness is growing and key indicators are deteriorating. That suggests watching developments closely rather than assuming the risk will disappear.
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