By Aaron Elstein, Crain News Service
NEW YORK (Oct. 9, 2013) — One way to put an end to the foolish talk about default, some finance pundits have postulated, would be for stocks to plunge in the next few days.
The thinking goes that such a calamity would force Congressional Republicans to lay down their arms and spare the nation the sort of disaster that default would bring.
Yet the stock market hasn't fallen all that far since default-talk started filling the airwaves and other indicators of fear, like the VIX index, [editor's note: VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index] haven't risen enough to nudge their way into the conversation.
But signs are beginning to emerge that investors are taking the prospect of default seriously.
On Oct. 8, the interest rate on a $30 billion auction of one-month Treasury bills reached 0.35 percent. That was the highest level since 2008, according to Bloomberg News, and substantially higher than the 0.16 percent rate on one-month bills on Oct. 7. Five days ago, the Treasury was able to find buyers for one-month paper at just a 0.12 percent rate. What's more, the yield on three- and six-month bills are significantly lower than for one-month securities, showing that investors are beginning to price in the odds of a short-term default crisis.
What's happening right now is exactly what a warning shot from the markets looks like.
Rising rates of course mean the federal government's borrowing costs are starting to rise, which is exactly what you'd expect to see as investors begin to wonder if the U.S. will honor its obligations. Rising borrowing costs, in turn, will make the government's debt burden grow.
For now, rates on the benchmark 10-year government bond aren't moving up all that much. That means investors in those securities are still confident they'll get paid back their money, plus interest. But that sort of confidence can dissipate quickly, as we're starting to see in the market for Treasuries that mature next month.
So keep an eye on the stock market, by all means. But Treasury bond prices offer a better window into the souls of investment pros who clearly are starting to take the reckless talk of default seriously.
Aaron Elstein writes a blog called "In The Markets" for Crain's New York Business magazine, a sister publication of Tire Business, and covers all aspects of Wall Street. This blog appeared on that publication's website.