Investors Unaffected by Debt Ceiling


Despite the looming possibility of a default if the government does not reach a deal to extend the debt ceiling by November 3, most investors are acting unusually unconcerned by the developments or lack thereof.


Apart from the market for insurance against default, it seems to be business as usual with very few noticeable price fluctuations that can be connected to the very real possibility of the U.S. hitting its debt ceiling. While short-term Treasury bills have seen a slight tremor with yields creeping slightly, there was no major carnage even after the Treasury canceled an auction planned for Tuesday.

In fact, there has not only a been a 7.5 percent rally in the S&P 500 over the last month, but also significant inflows into high-yield bonds for the past eight months which are probably a reaction to the long anticipated increase in interest rates by the Federal Reserve.

Lessons from the Past

The reason why investors are not really reacting to the possibility of a default could probably be due to the government being in a similar situation in both 2011 and 2013. While investors do realize and complain about issues within the system, they no longer see it as their problem. This blasé attitude could be mainly seen as, even if the crisis comes to fruition, the U.S. still represents the safest base to invest given the shark filled waters that the rest of the global economies currently represent.

Not only that, but deep down investors know that the policymakers, which include the Fed, will usually withdraw assets from the line of fire, and most investors have already been here before. In point of fact, this kind of situation is now becoming almost commonplace as can be seen by the relative lack of media coverage this time round. On the other hand, maybe the administration will let it fall into crisis again just to shake the market up a bit.


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