Debt-Ceiling Tail Hedges Are ‘Cheap Lottery Tickets,’ Bank of America Says

Investor indifference to the threat of a prolonged debt-ceiling impasse has left a handful of tail-risk strategies almost too cheap to pass up.

That’s according to Bank of America Corp. analysts, whose math shows that purchasing hedges now with options on the S&P 500 and gold would stand to yield profits more than 30 times the upfront premium should negotiations break down and markets react like they did in 2011.

Derivatives tied to those assets point to a very low probability of a crisis happening — even one that’s half as bad as 12 years ago. Based on BofA’s calculation, market-derived odds now sit between 4% and 6%.

Money managers are similarly unfazed. In a BofA survey, released this week, 71% of the pros say they expect a resolution before the government exhausts its options to fund itself. That’s at odds with a surge in the cost of insuring Treasuries against default that by some measures has eclipsed levels during previous debt-ceiling standoffs since at least 2007.

“Various asset classes remain seemingly calm about the current (arguably riskier) situation,” BofA strategists including Gonzalo Asis wrote in a note Tuesday. “We, therefore, find it sensible to buy S&P and gold hedges.”

S and P 500 Graph