With the deadline for avoiding a U.S. default looming, investors from Boston to Bangalore are moving to cash, extending the maturities of their short-term Treasury holdings and buying options to help protect themselves should stock and bond prices tumble.
Some JPMorgan Chase & Co. private bank clients are raising cash while others are dumping Treasury bills with maturities beyond the Oct. 17 debt ceiling deadline for longer-dated bonds. Stewart Capital Advisors LLC in Indiana, Pennsylvania, favors insurance companies, technology stocks and health-care providers, which now have lower valuations. Money is flowing out of an exchange-traded fund that tracks American banks and into overseas equities.
While most investors say a default will be averted, the potential for calamity should political leaders fail to renew U.S. borrowing authority before it runs out is moving some to take measures to safeguard their assets. A Treasury Department report on Oct. 3 said consequences would be “catastrophic” should the U.S. fail to make payments, including higher interest rates, lower investment and slow growth for decades to come.
“We want to protect capital first,” said Kevin Kearns, a fixed-income portfolio manager at Boston-based Loomis Sayles & Co., which manages $188 billion. While Loomis is forecasting that a default will be avoided, the back-and-forth negotiations may provoke some investors to sell assets. “We have our shopping list ready if things go on sale,” Kearns said.
ETF Moves
Kearns oversees $1.4 billion in a strategy known as long- short, where an investor can speculate on a security’s price either rising or falling.
Investors withdrew $4 billion from ETFs that track U.S equities between Oct. 3 and 8, data compiled by Bloomberg on fund flows show. At the same time, they added $418 million to the iShares MSCI EAFE ETF, which buys European, Australian and Israeli shares, the most for any ETF tracked by Bloomberg. The Vanguard FTSE Europe fund got $385 million, the second most.
Last week, investors withdrew $780 million from the Financial Select Sector SPDR Fund tracking financial companies in the S&P 500, the most since April 2010, according to data compiled by Bloomberg.
Options on the Chicago Board Options Exchange Volatility Index, used to hedge against stock swings, saw record volume of 1.78 million contracts on Oct. 8. Traders bought almost double the number of calls to buy compared with puts to sell that day, data compiled by Bloomberg show. Owning bullish options on the VIX, as the index is known, can offset losses when stocks drop because they become more valuable as price swings widen.
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