Markets putt a default risk premium on securities maturing in the second half of October – Rabobank

In the second half of October we could see a US government default if the debt limit is not raised by Congress. Economists at Rabobank find that the market is not yet too concerned about an earlier default than October 18. Conversely, they do see a significant premium for Treasury securities maturing in the second half of October over the past month.

Democrats are still struggling to find a compromise between leftist and centrist factions

“While the necessary raise in the debt limit is stalled in a budget reconciliation process that pits progressives against centrists in the Democratic party our ‘implied default window’ shows that markets are putting a default risk premium on securities maturing in the second half of October.” 

“Markets are not attaching a high probability to an earlier default caused by adverse cash flows of the federal government.” 

“Compared to earlier episodes, the risk premium is still modest. Since this is an intra-party standoff instead of a conflict between Democrats and Republicans, markets may be assuming that the risk of a US government default is smaller this time.”