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Chart of the S&P 500 Index illustrating the drop in value as a result of the 2008/09 financial crisis

GLOBE AND MAIL

In the midst of major political gridlock, we may just need markets to go haywire.

Crazy, I know. But look back over the past three years to understand why. Whenever a major economic catastrophe loomed, it was investors who scared politicians away from tumbling toward the abyss.

In the euro zone, debt crises erupted in three consecutive springs, and every single time borrowing costs in affected countries shot higher. In Spain the biggest hit came in 2012, when 10-year yields soared to 7.62 per cent from 4.87 per cent in just a matter of months. The outcome: that June the country nabbed a €125-million bailout for its troubled banks.

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Ditto for Italy. In late 2011, the country's 10-year bond yield skyrocketed to 7.26 per cent from 4.92 per cent. By December the government cobbled together a €30-billion package of spending cuts and tax hikes, prompting bond investors to take their foot off the pedal.

This isn't a recent phenomenon. Similar incidents occurred long before the 2008/09 crisis. A prime example: Canada in the mid-90s. It wasn't until the loonie was ridiculed as the 'northern Peso' that the federal government finally started to get its finances in order.

And yet, with the U.S. government shut down and another debt ceiling crisis unfolding, U.S. 10-year bond yields have barely budged. They now sit at 2.62 per cent, lower than where they were a month ago.

To be fair, major credit default indices, such as CDX IG (Markit's North American investment grade CDS index) and CDX HY (the North American high yield bond index) have shot higher. But they're still at levels last seen in March. Nothing out of the ordinary just yet.

Such blasé attitudes are verbalized on Bay Street and in the senior ranks of major Canadian companies. "We've made it through the previous crises; we'll make it through this one." And these players are acting accordingly. Instead of sitting on the sidelines, Rogers Communications and TransCanada are two examples of companies who just issued big U.S.-dollar denominated bond deals.

And they have every reason to. Investors are gobbling them up, seemingly without any worry that yields could soon rise and destroy the securities' values.

I know what you're going to say: it's hard for U.S. bond yields to soar because the Federal Reserve still has its massive bond buying program in place. But if enough investors were scared, surely they could make waves in the markets.

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Without at least some ripples, the Tea Party is all the more likely to think that compromise isn't necessary.

(Tim Kiladze is a Globe and Mail Reporter.)

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