Default doesn't seem to worry Wall Street

By BERNARD CONDON and MATTHEW CRAFT Published: July 15, 2011

The CEO of a big bank says a U.S. default could be catastrophic. The head of the Federal Reserve warns of chaos. And a credit rating agency threatens to take away the country's triple-A status.

The response on Wall Street: So what?

In Washington, the fight over the federal debt limit has grown uglier by the day. The White House says the limit must be raised by Aug. 2 or the government can't pay its bills.

But as the deadline nears, stocks and bonds have barely flinched.

The Dow Jones industrial average fell just 54 points Thursday and stands about where it did at the start of the month. The yield on the 10-year Treasury bond, which usually rises when seen as a riskier bet, is lower than it was earlier this year.

Risk versus liquidity

In theory, investors in U.S. Treasury bonds should demand higher interest payments when there's a greater risk they won't get their money back — in this case, in the event of a default.

Instead, the yield on the 10-year Treasury note rose only slightly Thursday, to 2.95 percent. In February, it was 3.74 percent.

In this market, size wins. The U.S. has $14 trillion in outstanding Treasury bonds. U.S. debt is held more widely and traded more often than any other government's IOU.

That matters because pensions, private investment funds and central banks the world over want to know that they can buy and sell these holdings fast — what investors call liquidity. During the credit crisis of 2008, investors bought U.S. Treasurys because they were perceived as not only safe but liquid.

Impasse may hurt credit

Credit rating agency Standard & Poor's is warning that there is a 50 percent chance it will downgrade the U.S. government's credit rating within three months because of the congressional impasse over approving an increase in the debt ceiling. In a statement, the rating agency said it is placing the United States on a credit watch.

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