I have used this line before but I had a boss once that liked to say if one person tells you that you have a tail you tell them they are an idiot. If two people tell you, you at least have to look

His point was that no matter how ludicrous something might seem, when there are more and more questions, or more and more data points, you have to dig in a little bit at least

There are many, myself included, that would suggest this debt ceiling stand-off will get resolved in the 11th hour. Yes, it will get political. Yes threats will be made. When all is said and done, politicians on both sides understand we can't push this too far. Right?

One of the reasons I gave for the large short in the 10 year Treasury this week was the potential that some investors may be starting to set up the trade of concern over this stand-off. It is easy to brush this off as non-sense. After all, there are other reasons to short Treasuries

There are a couple of other measures, though, that may speak more directly to the immediate concerns of the debt ceiling debate and I present those today

The first is the yield spread between 1 mo and 3 mo bills. The expected drop-dead date is June 15 or about 2 months from now. These two bonds straddle that drop-dead date, with 1 mo have no worries, and 3 mo having some worries

We can see that this spread, which over the last decade has been between 2.5 and 7.5 bps, and moved up to 50 bps ish over the last year given the expected rate hikes has had a more meaningful spike to 150 bps of late. This spike has everything to do with worries about the debt ceiling given even 1 mo captures the next FOMC

The other thing to look at us the sovereign credit default swap market for the US. It has moved from 15 bps at the start of the year to 162 bps at the latest reading. In the last two debt ceiling stand-offs in 2011 and 2013, we can see this spiked but only to 80 bps. One of those even included a debt downgrade

Thus, there are parts of the market that are suggesting maybe we should be taking this risk a little more seriously than most, including myself, normally would. Perhaps there are elements in the debate or the players, or the amount of debt that mean this could be more impactful

Other asset classes are clearly not showing this year. I talked about the Dollar, which is moving lower for other reasons and not this reason. I said maybe you get a free-ish option to short the Dollar

Perhaps relative equity market spreads that neutralize the beta = 1 risk but allow one to be short the US & long the rest of the world may make sense too. Something to consider

Sell in May and go away is getting closer. However, maybe this summer, there might be some things to pay attention to

Stay Vigilant

#markets #investing #stocks #bodns #debtceiling #stayvigilant