There's a divide in how traders are prepping for a debt-ceiling showdown

pulse

September 6, 2017 8:47 PM

Bond and stock traders are showing different levels of anxiety about the US government's ability to keep itself funded.

Congress is expected to pass a bill by the end of September

For now, stocks — or at least a measure of volatility expectations — reflect a more sanguine outlook for September and October. Rates traders, meanwhile, are shunning Treasury bills that mature around the same time.

First, lets look at the stock market

Mandy Xu, a derivatives strategist at Credit Suisse, examined the implied-volatility term structure for the S&P 500 (or SPX) a measure derived from options data.

Although the term-structure curve is upwards sloping — meaning traders anticipate some increase in volatility — there's no obvious kink around October.

Bonds are sending a different signal

Rates traders appear to have less faith than stock traders that Congress will be able to pass legislation on time. On Tuesday, a $20 billion auction for 4-week Treasury bills, which expire just after the debt ceiling could be hit on September, drew the highest yield since 2008, indicating much less demand for them.

The auction results, which one strategist described as ghastly, indicate bond traders are demanding a premium for the bills that will have to be repaid just as the government is hitting its limits. If they shared the stock markets faith that this will be a non-event, they presumably wouldn't ask to be paid more.

Also, the yields on existing bills that mature in early October are higher than those in the months afterwards, even though traders typically want a higher premium for holding onto bonds for longer.

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