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Some investors see growing risk of debt default


(MoneyWatch) The threat of a government debt default has resulted in a rapid increase in the amount of interest the U.S. has to pay for short-term borrowing. It has also boosted purchases of credit insurance on securities, suggesting that more investors are betting that the U.S. will default.

On Friday, interest rates on securities due in October fell from highs reached earlier in the week, while the rates on 30- and 60-day Treasuries jumped for a second day in a row. Yields on one-month Treasury bills that come due on Nov. 7 traded at 0.26 percent, unchanged from 0.26 percent late on Thursday. At the start of the month they were around 0.02 percent. The rising yields show concern, if not outright panic, that congressional leaders will fail to avert a potentially devastating default, with investors demanding a higher rate of return to hold U.S. sovereign debt.

Yields on Treasury bills maturing on Nov. 29 jumped to 0.18 percent on Friday, up from 0.12 percent late on Thursday and 0.05 percent on Wednesday. This suggests investors are worried that any deal to increase the U.S. debt ceiling will only be short term and just kick the threat of default down the road.

Last week also saw a huge surge of activity in the usually moribund markets for insurance on American debt. The past week saw average daily trading of credit default swaps jumped to $203.5 million, compared to around $2.2 million in the months before that.

This increase in CDS purchases shows that investors want to protect themselves against the chance the U.S. won't pay its bills. It could also be speculative bets on the possibility that the debt ceiling fight is going to get even more nerve-wracking ahead of a critical Thursday deadline to raise the debt ceiling. That doesn't mean the investors expect a default -- just that, as the possibility of default increases, they will be able to sell their CDS insurance to other investors at a higher price.

Not everyone is convinced this is a smart use of money. As financial pundit Barry Ritholtz wrote in his blog last week, "While I am not suggesting we are past whatever idiocy the jackals in Washington DC have dreamt up -- and there always exists the possibility it all comes tumbling down in a disastrous Mad Max canned food and bottled water dystopia -- I doubt that's the likely outcome. ... Remember, the end of the world bet has been a money loser since the beginning of time."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald,, CSO, and Boston Magazine.