The cost of a downgrade

Investors should be ready to fade a rally ahead of the federal government shutdown deadline, Newedge Senior Director and U.S. Credit, Equity and Policy Strategist Larry McDonald said Wednesday.

"I don't think we get a shutdown," he said.

Instead, McDonald said on CNBC's "Fast Money," a funding deal will be reached on Capitol Hill on Monday.

"The market should rally Friday into that because the market always figures that out first," he added. Then, investors should fade the rally into the debt-ceiling battle that will likely see concessions from President Obama on the Affordable Care Act.

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"The president's going to cave on the individual mandate," McDonald said, noting that Obama had conceded on the corporate mandate and adding that he would also give in on the Keystone XL pipeline.

"And that's the beginning of a grand bargain, which is very, very bullish," he added.

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McDonald said that bonds would likely rally a bit more and then start to fade into mid-October.

The U.S. Treasury Department estimated that it would run out of cash Oct. 17.

McDonald also said that increased volatility was to be expected.

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"We think we get a pump in vol between Monday and the 15th," he said. "You're not going to get this out of the president until you really squeeze him, and he's going to squeeze back. So, I don't think we get a deal until the 16th, 17th of October."

By CNBC's Bruno J. Navarro. Follow him on Twitter @Bruno_J_Navarro.

— CNBC's Michael Newberg contributed research to this report. Follow him on Twitter: @MikeNewberg.

Trader disclosure: On Sept. 25, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Jon Najarian is long AAPL; Jon Najarian is long FB; Jon Najarian is long MSFT; Jon Najarian is long LULU; Jon Najarian is long GRPN; Jon Najarian is long P; Jon Najarian is long ORLY; Jon Najarian is long SYK; Jon Najarian is long MGM; Jon Najarian is long WYNN; Jon Najarian is long MAR; Jon Najarian is long CERN; Jon Najarian is long COP; Jon Najarian is long FIO; Jon Najarian is long GPS; Josh Brown is long AAPL; Josh Brown is long GLD; Josh Brown is long XLU; Josh Brown is long TLT; Josh Brown is long XLF; Josh Brown is long F; Dan Nathan is long NFLX; Dan Nathan is long TSLA; Dan Nathan is long WFM; Dan Nathan is long ZNGA; Dan Nathan is long XCO; Dan Nathan is long calls VIX short puts VIX ; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long MSFT; Guy Adami is long AGU; Guy Adami is long NUE; Guy Adami is long BTU; Guy Adami's wife, Linda Snow, works at Merck.

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