Debt ceiling: Are you freaking out yet?

Click chart to check out how steady the 10-year yield is. By Charles Riley, staff reporterMay 3, 2011: 2:15 PM ET

NEW YORK (CNNMoney) — Did you feel the bond market shudder on Monday? No?

That’s funny, because Treasury Secretary Tim Geithner said he would start taking “extraordinary measures” this week to keep the country’s debt below its legal limit.

Despite the warning, Treasury prices inched up a tiny bit on the day.

So maybe all the bin Laden news was distracting investors from Mr. Doom and Gloom. After all, Geithner has warned repeatedly that a default by the United States on its obligations would have a “catastrophic economic impact.”

Still, the market didn’t move. Part of the reason: Investors have already assumed a few things about how this game of debt ceiling Russian roulette will play out.

First, the debt ceiling will be raised. It’s just a matter of when.

Kim Rupert, a fixed income analyst at Action Economics, said there’s no doubt the limit will be raised. Rather, it’s the guaranteed “trials and tribulations” of getting Democrats and Republicans to agree that has investors on edge.

Second assumption: Nobody — in the markets, or on Capitol Hill — cares about Geithner’s May 16 deadline. That’s the day he says the nation will hit the debt ceiling.

Geithner admitted as much Monday, writing in a letter to lawmakers that “it appears that Congress will not act by May 16.”

So Geithner is starting to do a little dance, shuffling money around so he can keep the country out of default. The Treasury Department will suspend issuance of special Treasury securities that help state and local governments fund infrastructure improvements, among other things.

But he says the music will stop on Aug. 2, 2011. And that’s the deadline people are paying attention to.

“We’re not seeing widespread panic yet, but Geithner hasn’t had to change any auction dates,” said Rupert. “There are a lot more smoke and mirrors Treasury can employ.”

But bond market players are keeping an eye on Washington, Rupert said.

She points to the recent battle over 2011 fiscal year funding, a debate that did not inspire confidence.

“They couldn’t get much resolution with just a couple billion at stake,” she said. “How are they going to get this done?”

In exchange for lifting the borrowing limit, Republicans are hoping to extract a promise of spending cuts, or put a cap on future spending in place. Democrats will push back hard.

So, how will bond markets behave in the lead up to Aug. 2?

That too is unclear. Treasuries are typically thought of safe haven assets in times of uncertainty. But this time around, U.S. debt is the actual cause of uncertainty. And the benchmark 10-year note has been stuck in the 3.2%-3.6% range for months.

Where will the smart money go?

“That’s the million dollar question,” Rupert said. “It’s like vector analysis.” 

First Published: May 3, 2011: 1:44 PM ET