NYT: How Wall Street is preparing for a debt ceiling showdown

© Ene

THE NEW YORK TIMES writes:

If the federal government defaults on its debt, the effects could be disastrous, threatening to undermine the role of the United States at the heart of global finance and tip its economy into recession. But after the government hit its debt limit and approaches the day when it runs out of cash to pay its bills, the stock market is showing no signs of panic. The S&P 500 is up more than 7 percent for the year.

That’s because in simple terms stock investors face a binary choice: Either lawmakers make a last-minute deal to raise the country’s borrowing limit, as in the past, or the nation reneges on its obligations, with potentially catastrophic consequences that are difficult for investors to comprehend, much less reflect in stock prices.

The precise day when the government would run out of cash, known as the X-date, is unknown, which also complicates trading decisions for investors. It could come as soon as June 1, according to recent comments from Treasury Secretary Janet L. Yellen.

“What you are seeing is a consensus view that we will not cross through the X-date,” said Ralph Axel, an interest rate strategist at Bank of America. “At the moment that remains a low probability event that is hard to price.”

The full post is here.