U.S. Default Risk Higher Than ETF Investors Realize

The first U.S. government shutdown since the 1990s has stretched into another day. If policymakers are not able to reach a compromise soon, Congress risks allowing the shutdown to run through October 17, the day the U.S. debt ceiling must be extended. While Moody’s Investors Service believes it is unlikely the U.S. will default on its sovereign debt obligations, the credit default swap market sees things differently.

Over the past three months, no country has seen its default risk spike more than the U.S. “While most countries have seen default risk fall significantly over the last three months, the US has seen its default risk spike by 36%.  And we can only expect it to spike even more as the fight in Washington intensifies,” according to Bespoke Investment Group.

The 36.4% jump in default risk for the U.S. over the past three months is roughly quadruple the increased default risk over the same time for Indonesia. Southeast Asia’s largest economy has been grappling with the adverse impact of high inflation and a widening account deficit brought on by the weak rupiah, the worst emerging markets currency this year. [Indonesia ETF: Value Plays?]

Over that time, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) has plunged 14.4%. Vietnam, which is attempting to implement a TARP-esque asset management company to relieve its banks of bad loans, has seen an increased default risk of 3.2% in the past three months.

The Market Vectors Vietnam ETF (NYSEArca: VNM) is up 1.6% over that time, which is not much worse than the SPDR S&P 500 (NYSEArca: SPY) and far better than the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT). [Vietnam ETF Deals With Debt Problems]