The headlines about the market’s reaction to the debt ceiling debate are conflicting. RBC writes “markets are betting on a rocky end to the debt ceiling debate roiling Washington, but if they are wrong, investors may miss out on the gains.”
Bank America on the other hand writes “investor indifference to the threat of a prolonged ceiling impasse has left a handful of tail risk strategies almost to cheap to pass up” further writing “the “derivatives tied to such assets point to very low probability of a crisis happenings, market derived odds now between 4% and 6%.”
The VIX, or the widely followed fear gauge, is around 17.5, hovering nominally higher than the all-time lows.
And then there are short dated credit default swaps on the Treasury which are more expensive than countries that have once defaulted including Greece, Russia and Brazil.
The headlines also suggest Washington may be “getting it.” It appears almost every organization/trade group is pounding Washington to settle the debt ceiling now and end this financial brinkmanship. It is not worth the cost to placate the party’s most ardent idealogues.
Yesterday’s the S & P 500 advanced about 1.1% on the above belief as both Speaker McCarthy and President Biden stated default will not occur and both sides are moving closer to a compromise.
Treasuries sold off across the curve.
What will happen today?
Last night the foreign markets were up. London was up 0.64%, Paris up 0.99% and Frankfurt up 1.68%. China was up 0.40%, Japan up 1.60% and Hang Seng up 0.85%. Futures are flat ahead of a potential debt ceiling compromise in the coming days. The 10-year is off 8/32 to yield 3.60%.