the market is voting with their wallets

by Paul Meloan

Depending on whom you believe, and I am not sure I believe anyone, the U.S. is either faced with a crisis over its ability to pay its debts and a looming default, or not.

Right now, the market is voting "not."

Right or wrong, the market is voting in what it will bid on US Treasury debt, and there has been zero movement beyond the normal gyrations on debt for what has heretofore been touted as the "risk free rate of return" in the market.  Take a look here for yourself.

If you were a lender, the rate of return you would demand on your money is tied to two things: your assessment of your chances of being paid back on time, and in full; and the comparable returns being offered by other risk-assets (like buying stocks, real estate, or gambling on commodities).

Treasury debt has always commanded the lowest yields because the market always voted that the chances of being repaid on-time, and in full, were as close to a certainty as death and taxes.  Persons who needed that certainty have paid a premium for it, in the form of lower overall returns than just about any other asset you care to name.

The price of this certainty is determined every day, in the form of what investors are willing to charge to lend money to Uncle Sam.  Right now, Uncle Sam still looks good to them.

With all the noise coming out of DC about what it will take to raise the debt limit, the possibility looms of at least a technical default.  If the U.S. government were to miss an interest payment, even for a day, it would break a streak of fidelity that goes back to the infancy of the republic.  Even in the worst days of the Great Depression, the U.S. Treasury was open for business, and made good on all of its debts, on time and in full. 

The markets reaction to this has been to collectively yawn.

In times of great noise, it is probably best not to listen to what's being said, but rather to watch what is being done.  With all the noise about the debt issue, what's being done by the market is collectively nothing.