US Default Risk Jumps To Highest Since February 2010 On Debt Ceiling Worries

So much for the market "completely ignoring" the total chaos and complete cacophony out of the tragicomic DC soap opera which is transitioning into less of a comedy and into more of a tragedy with each passing day. For everyone still wearing rose-colored glasses here's a refresher: stocks dropped, the S&P expressed in dollar terms, or adjusted for loss in dollar purchasing power is now negative for the year, bonds tumbled despite a "strong" auction driven almost entirely by Direct Bidders on the margin, and, the kicker, US CDS is now at 56 bps: US default risk is now the highest since February 2010.

US CDS:

The S&P priced in dollars:

Here is one attempt at an explanation from the media, always so eager to assign plotlines to an otherwise irrational market:

Vigorous bidding for this week's entire $66 billion worth of government debt supply was expected to rekindle a bond market rally that had sent benchmark yields to their lowest more than seven months on Tuesday.

Instead the afternoon market sell-off left traders and analysts scratching heads, looking for answers.

"We were surprised by the resilience of the market going into this week's supply. It's quite ironic that we ended up lower after a strong auction," said Rich Bryant, head of Treasury trading at MF Global in New York.

Traders and analysts blamed the day's perplexing market action on a combination of factors.

Those included Federal Reserve Chairman Ben Bernanke's remarks that the U.S. central bank is "not prepared at this point" to take action on more stimulus, competition from a $1.75 billion 30-year bond deal from J.P. Morgan, and a news report Washington has reached a budget deal but the size of cuts was smaller-than-expected.

Shortly after the 30-year auction that briefly helped pare losses, Dow Jones Newswires reported the White House and Congressional leaders could agree to about $1.5 trillion in deficit cuts and might be able to agree to an additional $200 billion in cuts.

"The market is telling you that the cuts are not deep enough," said Mark Pawlak, market strategist with Keefe, Bruyette & Woods in New York.

Here's another: the ponzi is starting to unravel, as evidenced by the unprecedented amount of micromanagement in every single aspect of the market - in the US (the Chairman's every word, out of context, can now move the market up and down by 20 S&P points), in Europe (the ECB - nuff said), in China (Japan 's BOJ JPY intervention last night, China's interbank markets locked up for a third week in a row needing PBOC intervention at each step), and virtually everywhere else where non-centrally planned money still flows.