Photo Courtesy of Flickr

With the August 2nd deadline looming, the big question on a lot of people’s minds is the possibility of default for the United States. A temporary one would absolutely smash investor confidence in the risk free US treasuries which have been regarded as the safe haven in the modern financial era. But for better insight let’s look at a comparison of spot yields for different nations which have experienced debt servicing difficulties.

For those of you who’ve My Big Fat Greek Wedding, you’ll know that with exuberance comes a cost which cannot be sustained by the fruitful gains of others. The recent spate of news around Greece is a result of policies which have been too short sighted in their vision. As a result, the Greek 2 year bond spot yield to maturity (YTM) has skyrocketed in recent months as shown by the following chart:

Photo Courtesy of Bloomberg

This year to date chart shows the dramatic increase in spot yields from less than 10% in January to now more than 30%. This is truly an astonishing increase, but for a better comparison its worthwhile looking back 3 years to see the progression of yields as news of a possible Greek default surfaced and to see how this compares with a timeline of US announcements.

Photo Courtesy of Bloomberg

The chart above shows the percentage change of spot YTM based on a base level 3 years ago for Greek 2 year benchmark (green), Portuguese 10 year benchmark (Orange) and US 10 year benchmark(Dark Orange). As we can see from the following the chart, the current YTM has in fact decreased compared to 3 years ago, in part driven by strong buying after recent turmoil in European treasury markets. If we were to look back at 1H 2010, when news broke of Greece deficit troubles, we see significant spikes in YTM.

Compared this with US spot YTM and we see a significant difference. Although an incredibly low Federal Funds Rate in addition to safe haven buying are factors to be considered in analyzing current US 10 year YTM, it must be said that if investors ever had an inkling of the possibility of US default being a real and serious threat, the YTM should then be much higher than today’s levels.

Despite a string of recent news on the roadblocks in Republican and Democrat negotiations, the market has apparently not priced the risk of default with a high probability. The risk of default for the US is on the tables, albeit small according to information from the market. Expect markets to become more mercurial and VIX to swing up as news and announcements trigger hairpin decisions by speculators on both sides of the trade.

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