The cost of insuring against a catastrophic US default jumped to its highest level in more than two years today after talks to prevent a breach of the nation’s $16.7 trillion (£10.5 trillion) debt ceiling faltered.
Investors are braced for a hugely volatile week, with three days to go before the October 17 deadline as Democrat and Republican leaders in the Senate resume negotiations tonight. Talks between the White House and Republicans in Congress broke down over the weekend, pricking the buoyant mood in equity markets late last week and pushing jittery dealers to the sidelines ahead of Thursday.
Financial data provider Markit said investors were rushing to buy insurance against a potential default in the credit default swap market. The cost of insuring against a US sovereign default in the next year jumped 11 basis points to 0.72 per cent today — meaning that investors have to pay €72,000 (£61,000) to insure €10 million of sovereign debt. This is the highest price since July 2011, when the last debt ceiling crisis went down to the wire before agreement and cost the US its AAA credit rating. Markit analyst Gavan Nolan said: “This is usually an illiquid market but activity has picked up a lot in the last couple of weeks.”
Chancellor George Osborne joined senior policymakers from around the world in urging the US to resolve the debt ceiling impasse, warning of the “extremely serious” consequences of a breach. IMF managing director Christine Lagarde added that a default would result in “massive disruption the world over”.
The FTSE 100 was virtually flat, adding just 4.42 points to 6491.61 as wary investors sat on their hands or sold banks and miners in favour of more defensive stocks. European indices were also mixed with France’s CAC40 and Germany’s Dax down, although Italy and Spain made modest gains. Trading was muted in Asia, with markets in Tokyo and Hong Kong closed for holidays.
IG technical analyst Brenda Kelly said trading volumes were “mediocre”, while ETX head of trading Joe Rundle said: “Things will get more volatile as we get closer to Thursday but thin volumes will mean we could see 100-point swings either way. Nobody is putting on any big positions ahead of Thursday — I wouldn’t want to when the positions are so binary. But default is so unthinkable markets think a deal will be done.”
Currency traders also shunned the dollar in favour of the Japanese yen today as the greenback slipped 0.3 per cent to 98.26 yen and the Swiss franc also gained ground.