Spike in Short-term Treasury yields shows market fear of a U.S. default
NEW YORK (CNNMoney) Some investors are taking cover in preparation for a possible U.S. debt default.
Where are the signs of market fear? Look no further than short-term Treasury bills, U.S. government debt that matures over the next 30, 60 or 90 days.
Rates for these government bonds have been spiking over the last several days as investors bet that the government won’t be able to make debt payments later this month.
Fidelity Investments’ money market mutual funds have sold off all their Treasury bonds that are due in late October and early November.
“Fidelity expects that Congress will take the steps needed to increase the debt ceiling. Nonetheless, we have been taking precautionary measures,” Fidelity said in a statement.
While many investors still think the chance of default is zero, some analysts are more nervous. Potomac Research’s chief political strategist Greg Valliere recently upped the odds of “the unthinkable” actually happening. Valliere said that after talking to Tea Party members of Congress he now puts the likelihood of a debt default at 20%.
Bets were bigger in 2011: The U.S. had a similar debt ceiling drama in 2011. Many investors say that they were more worried back then about a default.
“Fear of a default was more intense in 2011,” said Tad Rivelle, chief investment officer of fixed income at TCW. “It’s like the boy crying wolf. The market doesn’t really think this threat is credible.”
For now, most investors are content to ignore the possibility. The Dow is down less than 2% since the government shutdown began 10 days ago.
Most analysts and investors agree that if there was real concern about a default, stocks would be plummeting.
The CBOE’s Volatility Index , commonly known as the VIX, is often used as a proxy for investor fear. It’s been spiking since the shutdown, but it hovers just below 20, roughly half of where it traded in 2011.