How Wall Street is Preparing for a Debt Ceiling Showdown

The closest parallel to the current standoff is the brinkmanship over the debt ceiling in August 2011. In July, the S&P 500 traded near its high for that year. But by Friday, Aug. 5, when S&P downgraded the country’s credit rating, the index had dropped by over 10 percent. By the following Monday, the index had fallen more than 16 percent from its July peak.

Investors are aware of the risks of a repeat and, outside of the stock market, there are signs of caution creeping in. Already, investors have backed away from owning government debt that expires around the time the government is expected to run out of money.

Last week, the Treasury Department borrowed money for four weeks at an interest rate of almost 6 percent, well above what it has recently paid to borrow for much longer periods, reflecting investors’ unease over what might happen around the X-date.

The cost to protect against the government not paying its debts, using derivatives contracts called credit default swaps, has also shot higher, suggesting a rising probability of default.

Gold prices have risen more than 10 percent over the past two months, attributed in part to investors seeking out the safety of the precious metal, which is expected to retain its value through bouts of market turmoil. It’s hard to untangle some of this trading activity from broader worries about the economy, especially after the recent series of banking troubles, as many investors have already positioned their portfolios defensively.