Complete lack of economic data today lead to some super quiet trading hours. I struggled to find liquidity even in the most straightforward treasury market so I had to look for other ways to entertain myself.
All eyes remain on the debt ceiling fiasco. I for one don't believe for a second that there is any real risk of default. However with Moody's and S&P's repeated warnings about a potential downgrade of the U.S. credit rating, the entire issue seems to be taking a decidedly more volatile turn. Now a default would be an event but a downgrade is something based on probability not events. With each passing day, where the two sides are bickering and competing on who can throw more toys out of the pram, the probability of a downgrade increases steadily. So many deadlines have passed that I can hardly remember when the next one is. Nevertheless one would be right in thinking that we need a breakthrough by the end of this week to allow just a little bit of time for legislative procedures.
I've decided to sit relatively light for this week with a small short gamma position. You see I have faith:). In the event of a downgrade I would imagine an initial massive sell off of US treasuries, accompanied by an even more humongous sell off in equities, at which point things become extraordinarily messy. Investor would invariably recalibrate their risk appetite in such an event and very possibly move away from the stock market to return to the treasury market as the latter is perceived as the "lesser of the two evils". It's late and I'm not completely sure if this logic is somewhat flawed. What are your thoughts?
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