(Bloomberg) -- Beneath the relative calm in American equity markets amid the standoff over the US debt limit, signs are emerging that investors are moving away from companies with outsize reliance on federal government contracts.
A basket of mainly defense contractors compiled by researchers at Citigroup Inc (NYSE: C ). has fallen 3.7% in the past four weeks, over 3 percentage points worse than the S&P 500 . The firm screened for companies that derive at least $250 million and 5% of their total annual revenues from federal contracts. It includes Raytheon (NYSE: RTN ) Technologies (NYSE: RTX ) Corp. and Northrop Grumman Corp (NYSE: NOC ). — which are both down at least 4% since Treasury Secretary Janet Yellen warned on May 1 that the government could run out of money to pay bills as early as June 1.
Although there are plenty of other factors weighing on investor sentiment — including recession risk, uncertainty around the Federal Reserve’s next moves and sticky inflation — fears of a potential US default are cropping up in parts of the market. Within options, hedges against a volatility breakout are seeing the most demand in five years. And the cost of credit-default swaps on one-year Treasuries has soared to a record.
Read more: Hedge Fund Manager Wadhwani Says US Default Risk Worse Than 2011
To the team of Citi strategists including Scott Chronert, US equities are not pricing in enough event risk around a debt-ceiling standoff. While prices have fallen, the 30-day implied volatility for the basket of stocks has dropped all year.
“Investors looking to mitigate event risk could consider some traditional hedges as we expect S&P 500 downside into mid-year,” the strategists wrote.
©2023 Bloomberg L.P.
Add Chart to Comment
We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
- Enrich the conversation
- Stay focused and on track. Only post material that’s relevant to the topic being discussed.
- Be respectful. Even negative opinions can be framed positively and diplomatically.
- Use standard writing style. Include punctuation and upper and lower cases.
- NOTE: Spam and/or promotional messages and links within a comment will be removed
- Avoid profanity, slander or personal attacks directed at an author or another user.
- Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
- Only English comments will be allowed.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.