Global Macro: Equity and Credit Protection Slightly Split
NEW YORK ( TheStreet) -- Markets for protection in both equities and credit are telling slightly different stories about the debt-ceiling debate, but both predict an actual default is unlikely.
Equity markets are not seeing robust demand for downside protection, even though failure to negotiate raising the debt ceiling would lead to a steep selloff in equities.
Credit protection, known as credit-default swaps, on the other hand, are at highs not seen since August 2011.
In times of fear, equity investors buy put options as a form of downside protection on their assets in case prices drop rapidly.In credit markets, investors protect their assets from potential default risk by purchasing CDSs to hedge returns on principal if a default does occur. (VXX) remains at yearly lows, as seen in the chart below. Equity market volatility is usually expected as the days move closer to a government shutdown. Now, however, we expect political wrangling and a last-second resolution to the problem. The U.S. government is as polarized as it has ever been in recent decades, leading to even the simplest policy debates splitting factions down the middle. Follow @AndrewSachais This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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