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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 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.
The basket also holds health care and information technology stocks, including Pfizer Inc. (NYSE:PFE) and Accenture (NYSE:ACN) Plc, which have slipped as well.
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.
