Saturday, July 16, 2011

Why Wall Street doesn't seem worried about default

The CEO of a big bank says a U.S. default could be catastrophic for the economy. The head of the Federal Reserve warns of chaos. And a credit rating agency threatens to take away the country's coveted triple-A status.

The response on Wall Street: So what?

In Washington, the fight over whether to raise the federal debt limit has grown uglier by the day. The White House says the limit must be raised by Aug. 2 or the government won't be able to pay its bills, possibly including U.S. bonds held around the world.

But as the deadline nears, stocks and bonds have barely flinched.

The Dow Jones industrial average fell just 54 points Thursday and stands about where it did at the start of the month. The yield on the 10-year Treasury bond, which usually rises when investors see it as a riskier bet, is considerably lower than earlier this year.

It may seem an odd, even reckless, reaction by investors. But it isn't completely crazy.

Take the ho-hum reaction from the bond market. In theory, investors in U.S. Treasury bonds should demand higher interest payments when there's a greater risk they won't get their money back -- in this case, in the event of a default next month. (more)

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