FYI | Oct 04 2013
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
A lot of people have wondered why the market has been fairly sanguine on the US government shut down and the debt ceiling issue. With Republicans and Democrats still at each-others’ throats and no sign of a break in the impasse any time soon, stocks may have moderated, but they have hardly fallen off a cliff, likewise, risky FX has managed to hold up fairly well, alongside commodities.
However, take a look at the very short end of the US Treasury curve and you see panic. The 1-month Treasury yield has surged to its highest level since the end of November 2012. Treasury bills of very short duration would most likely be at risk if we get a US credit default in the next couple of weeks.
The prospect of a default in the world’s richest economy may sound preposterous, but investors are starting to price in the unexpected. It is worth keeping an eye on the very short end of the Treasury curve, as further nervousness here could spill into other markets.
Figure 1:
Source: FOREX.com and Bloomberg (Prices displayed on the chart might not reflect Forex.com prices)
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