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. Long Short 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. The Standard & Poor’s 500 Index jumped 2.2 percent to 1,692.56 at 4 p.m. in New York. ETF Moves 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 Minute Most investors have yet to become concerned that the debt ceiling will be breached, citing the last-minute resolution of the August 2011 showdown as a model that shows a deal will be achieved in time. Treasury Bills Concern that a default might happen is starting to show up in the market for short-term obligations of the U.S. Treasury. Money Markets Money-market mutual funds can cope with a short-term default in U.S. Treasuries as long as it doesn’t trigger the kind of investor run that followed the collapse of Lehman Brothers Holdings Inc. in 2008, according to Fitch Ratings. Corporate Borrowing The market for corporate borrowing through IOUs expanded to the highest level in eight months as investors turned to alternatives to short-term Treasury bills amid the impasse over raising the U.S. debt ceiling. Equities Collars Hong Kong’s futures and options market operator, Hong Kong Exchanges & Clearing Ltd., increased the discount on Treasury bills used as collateral for margin requirements today, citing concern that the U.S. is at risk of a default. VIX Options Investors who are concerned about a default should use an options strategy known as a collar on their largest or most volatile equity holdings, according to Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp. in Austin, Texas. To implement the trade, investors buy a put, or option to sell, with an exercise price below the current stock level, financed by selling call options with a higher strike price. ‘Worst Case’ The S&P 500 has gained 0.7 percent since the U.S. government shut down last week. The VIX slid 0.7 percent to 16.48 over the same period, as a 16 percent tumble today erased an advance to as high as 20.34 on Oct. 8. That compares to a level of 48 when S&P cut the U.S. debt rating in August 2011, the highest since before the bull market started in 2009. Treasury Hedges UBS Global Asset Management, a money manager that oversees $644 billion, said it has bought Treasury options to hedge against the U.S. defaulting should politicians fail to agree on raising the nation’s debt ceiling. The company bought two-year Treasury puts and sold those on German two-year note futures to mitigate the risk, according to Brian Fehrenbach, the company’s Chicago-based co-head of U.S. multi-sector fixed income. “That’s part of our defensive strategy and it’s something we hope will not be tested,” Fehrenbach, a former derivatives trader, said in an interview in London. “The uncertainty in Washington doesn’t promote confidence. The longer they go without a resolution, the more risk there is for a last-minute mistake.”
