Just for Funsies ...

July 5, 2011 3:20 PM

Let's say the Congress and the President are unable to reach a deal on raising the debt limit by August 4th. And let's just say, among the things that happen is that buyers of U.S. Treasury notes, bonds, Tbills, etc. on the August 15th Treasury sale demand a much higher interest rate to compensate for the fact that the "full faith and credit of the U.S." has been tarnished.

If the U.S. defaults, the stock market might fall but would it be a buying opportunity when it hits bottom, meaning is it a good time to pull money out of bonds? What about lower level bonds, like U.S. Savings Bonds? Will they also lose value? Will their yield change? What about their maturity date? Might either be adjusted? Or is it feasible to say nobody knows what will happen regardless of what we would like to believe will happen?

posted by CollectiveMind to law & government (5 answers total)

The stock market plummeting always counts as a good time to buy, but knowing when it has actually hit bottom takes more luck than skill.

Bonds will depend largely on how tightly tied to the federal government the issuer appears; Corporate bonds will likely shoot up as people flock to them, but beware (for example) military contractors; Muni bonds should remain stable, but in some of the "red" states that tend to receive a ton of federal money, they could follow the Fed down. And T-Bills... Oy. Suffice it to say, if you still own them at this point, you clearly believe that the morons in DC will raise the debt ceiling. ;)

That said, you already hit the nail on the head - No one really knows what will happen, and great question - I look forward to seeing other answers!
posted by pla at 3:38 PM on July 5, 2011

The discount rate of tbills seen here) hasn't been going up. In fact they look like they're still record lows according to this. As pla said, if other investors expected bad things, you'd expect it to be showing up in the price. Apparently they're still more scared of every other investment instead of the US treasury.
posted by garlic at 3:59 PM on July 5, 2011

There's a big difference, and a long way between the Congress failing to raise the debt limit by an arbitrary date in August, and the U.S. actually beginning to default on obligations. The difference is that while a failure to raise the debt ceiling immediately limits Treasury's ability to borrow by bond issuance, there are a lot of actions (the long way) the Government can take to conserve or even create cash flow (furlough or layoff employees, shutter facilities, sell assets, raise user fees, sell oil tract leases, collect unpaid fines, pull back contract deposits and pay aheads, etc.), divert free cash to pay obligations (including paying off earlier maturing bonds to gain headspace under the current debt ceiling), and keep on running relatively normally, for several months.

The stock and bond markets will take a failure to raise the debt ceiling by the August 2 date as Big News, but it's otherwise likely (even by then) to have been a Slow News Summer, and the market hawkers are looking for anything to get a little action going, in a long sideways market story since last winter. Buying or selling in any major way, strictly on the basis of this one news item isn't a protip play.

But, IANYB (I Am Not Your Broker) and TINIA (This Is Not Investment Advice).
posted by paulsc at 4:06 PM on July 5, 2011

The US is being fazed out of its global hegemon position quite gently, which is wise. I wouldn't expect anything too dramatic. Money will be found to prop things up while the spending cuts happen.

Long-term, though, they have to happen. I'd expect a bunch of mini crises which help otherwise unpalateable measures get pushed through. The US' creditors don't want things to spiral out-of-control, but they also won't go on lending money to it indefinitely at near zero interest-rates. So what happens is mostly a question of how skillfully the transition to a different sort of country can be managed.
posted by Net Prophet at 4:58 PM on July 5, 2011

Paulsc, really! And here I was about to send you a check for consultation services. Darn! All, thanks for your thoughts.
posted by CollectiveMind at 12:01 PM on July 8, 2011