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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Debt Ceiling and US Treasury Investments

24

Comments

  • edited January 2023
    "These cat-and-mouse games in DC are dangerous in that mistakes can happen, or something unpredictable happens."

    @yogibearbull- Thank you for a dose of reality.

    Rx: Take one dose, daily. This prescription is renewable. Indefinitely.
  • I would short the USD or go long on international currencies.

    I doubt there will be an actual default but there will be plenty of destabilizing theatrics in advance of the debt limit being raised.
  • idiots in tx elected chip roy instad of wendy davis.
    https://www.yahoo.com/now/let-fight-now-over-us-161106323.html

  • I don't have a plan as yet, but, as has been pointed out, "The coming default will affect all markets".

    I am still looking for options that minimize the damage to my portfolio in case of a US government default.

    After reading all the responses to my OP, I see only two options that I, as a retired and conservative investor, would consider under these hopefully unlikely circumstances: a combination of a US Treasury only money market fund and FDIC insured CDs from large national US banks. 

    In the meantime, I will continue to look for other possibilities that would minimize the effect of a default on my portfolio, and that are not too difficult to implement and manage for a man of my age.

    Good luck,

    Fred
  • Good points YBB.
  • edited January 2023
    Me, not worried at all, dip in various asset prices will be temporary at best.

    Do you expect China & Japan selling their treasury bills cache? They hold more than 1 Trillion US$ worth of treasury bills each.

    Saying - if you take a loan of say 100,000 US$- you are worried to pay but if you take loan of 1 Million, the banker is worried if it will get paid in time.
  • edited January 2023
    My 2c

    In the event of a default, US debt holders would (initially at least) get the highest priority followed by SS/Medicare (potentially with some haircuts). FDIC would imo be behind SS/Medicare and very likely behind federal workforce pay too. And don't expect defense hawks to take haircuts(even temporary) without significant protest. Defense contractors in the big picture outrank most everyone else for claims to the federal budget.

    Agree that any dislocation would be "temporary" but the duration of the temporary is unknown -- hours/days/weeks/months??
    We have long crossed the line of crazy and "normal" laws do not apply at times of extreme distress or to too big to fail scenarios.

    A few examples
    GM went into bankruptcy where ordinarily bondholders would be made whole by selling off assets. Instead bondholders basically got hosed through a "controlled" bankruptcy by the WH and unions and management walked away with a pretty good deal on the new GM. Similar situation with American Airlines.

    During Covid, real estate owners and mortgage servicers were forced to provide free goods and services for the social good. But nobody else was forced to do the same -- utility, supermarkets, rail, bus, etc.. Property owners still owed property tax even with revenue forced to zero. It is commendable that society wanted to assist those affected by Covid but society as a whole didn't undergo any pain for this assistance. A moratorium on property taxes from property owners would have led to reduced services from counties and a broader impact which would be a more equitable distribution of pain (or temporary tax increases on everyone above a certain income threshold) but as we all know far more easier to get a small section of society to bear all the pain.

    I bring up these examples because imo in the event of extreme distress, making whole owners of FDIC protected CD's would be politically a lower priority than paying SS/Medicare bills for the same reasons -- CD owners have the money and will be fine whereas those collecting SS are deemed to be more in need and hence a higher priority.
  • The contrarian in me says all this talk about the safest Treasury bonds defaulting means it’s a good time to buy aggressive growth stocks.

  • @Staycalm

    Useful philosophical musings, but I have rarely seen concern for fairness in any policy making. There are many examples on both the right and the left. Lefties point to the tax structure etc but my favorite still has is the outrageous health insurance benefits (in CT work for the state for ten years, then quit and you still get lifetime health insurance!), retirement funds ( top 3 year average including overtime determines defined benefit) and high salaries a lot of state Government union workers continue to get, just for signing up ( and keeping) a job.

    More to your point and what would happen in a default: I expect the reaction worldwide to an actual default would be so extreme that there would be little thought given to prioritizing in the days ahead who got paid with what was left.

    After the Dow etc. drops 10000 to 15000 points overnight, ( and Gold goes to $5000 ) the debt ceiling will quickly be passed. Any legislator who votes against it will likely be run out of town.

    @fred495

    To take maximum advantage of the possibility, I would buy Treasuries and Gold, but be prepared to trade into stocks quickly. Other commodities necessary for survival will probably also skyrocket, although since most are priced in Dollars, hard to tell.

    I don't think accumulating a month's worth of expenses in dollar bills is a bad idea either, or stocking up on canned goods and booze. I will certainly fill up my gas tank. ATMs and credit cards will probably not work very well.
  • @sma3 Show me the union worker who gets paid what Carly Fiorina did for driving Hewlett-Packard into the ground. There are any number of terrible executives who routinely get paid hundreds of times what the average worker makes for significant wealth, environmental and job destruction. This idea that union workers are overpaid for demanding benefits like lifetime healthcare is misguided. It’s not that they’re overpaid and have benefits they don’t deserve. The non-union workers are underpaid and lack necessary benefits. Everyone should have healthcare.
  • @LewisBraham

    for future reference

    https://www.usdebtclock.org/# ( has a separate clock for each state)

    Also lists Medicare and Social security deficit, but I am unsure where those numbers come from.

    While this is a bit off topic, the debt burden for state employee unfunded pensions and health care obligations are enormous and could make the debt ceiling fight look like a minor squabble, because it will pit "haves" vs "have-nots" and states cannot print their way out of it. Some "red states" are seriously affected.

    https://www.pewtrusts.org/en/research-and-analysis/articles/2022/07/07/states-unfunded-pension-liabilities-persist-as-major-long-term-challenge

    "After New Jersey (20.2% of personal income), unfunded pension obligations were highest in Illinois (19.4%), Hawaii (18.0%), Alaska (16.3%), and New Mexico (15.7%)."

    Kentucky is 15.2 % South Carolina is 11%, Mississippi 14% . ( this does not include health care costs)

    I completely agree that even successful CEOs ( and for that matter even non-profit hospital CEOs) pay etc is morally outrageous at thousands of times the average worker's salary.

    However, I find it offensive when a state government ( CT is the state I know the most about) establishes a protected class of workers ( ie Unionized public sector employees) and endows them with wildly enormous benefits and perks ( out of proportion to their contribution to society) that are unavailable to private sector employees, and then requires private sector employees to pay for these benefits. Afraid to increase taxes to pay for it, the legislature then runs up enormous debt for future generations ( in CT's case about $70,000 per citizen in a state with a declining population).

    Both political parties are equally guilty.

    The same thing is true of the benefits that Legislators give themselves.

  • edited January 2023
    Thanks, stayCalm and sma3, well said and very informative comments.

    Treasury only money market funds seem to be one of the best options if this hopefully unlikely event occurs.

    Much appreciated.

    Fred
  • @sma3, could not agree with you more! You have articulated what I have failed to state in the past. I would say that many of these states are depending/banking on a left leaning federal bailout...what happens if that is not so? Who knows but maybe a good topic of where to move to avoid these types of potential situations or is that too extreme?

    @LewisBraham...you bring up Carly HP...reminds me of Bernie ranting about the billionaire's...pointing to the outliers to make your point...although would agree that it is almost inconceivable that we don't have national health coverate in this day and age...and like my very left leaning neighbor states, "does anyone really need to be a billionaire?" Truth. But, where does that stop, how about a millionaire? Who decides?

    Back to the origianal question...if things start to look real wonky with the debt limit, I would pour my monies into something like HSAFX who might actually gain monies from the prior and after 3 months? Also would consider pair trade something like 55% HSGFX/45% VELIX...dunno, your mileage might vary?

    Good points you all make, good luck and good health to everyone!

    Baseball Fan
  • edited January 2023
    @sma3 And I could provide any number of charts like this one below explaining why there are government pension short falls and large amounts of debt because we are borrowing from the wealthy and thereby increasing our federal and state debt instead of taxing them to pay for government services. This one below is just for income tax, but you can see similar downward trends for estate taxes, corporate taxes and capital gains taxes. There was even one year, 2010, when there was no estate tax at all because of legislation passed previously in the Bush era. I believe the Yankees George Steinbrenner died that year and his heirs were pretty lucky--financially that is.
    The size of the debt and who owns it also goes a long way in explaining why we will not default on Treasury bonds. Despite their grumbling about government workers, wealthy investors want us to keep borrowing from them instead of taxing them to pay for workers pensions and healthcare. And how is healthcare an "enormous perk?" Other nations provide it for all of their citizens whether they work for the government or not:
    image
  • edited January 2023
    We can have turmoil and crisis but if it will not last for months-years, the global financial system will collapse. If you can't trust MM in Vanguard, Fidelity and Schwab we have a bigger problem. A real crisis would lead to big stock+bond decline, and shutting down trade. We had already
    www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp

    The most important, what should you do now? I don't see any good solution and the ones you think are good, may hurt you even more.
    But, if you insist on being afraid, maybe you should buy gold and fill your basement, or maybe you can build an underground stand alone bunker and get all the power from the sun + fill the bunker with food and guns.

    It makes me smile when investors worry about something with low chance of happening, AKA, shut down the global financial system...
    But, have no problem holding to stocks and losing 20+% at the bottom, or when bonds lose over 10%...all happened in 2022.
  • edited January 2023
    @all

    CEO pay is outrageous but so is the case with public sector unions. I am not familiar with public sector pay in CT but it is beyond insane in CA at both state and local govt. levels. The class that gets really hosed is private sector non-union who ends up funding cushy benefits for everybody at local, state and federal levels.

    Pretty common in CA to retire in mid 40's, collect a pension and get a 2nd job. The number of 6 figure pensions(even at the local govt. level forget state) is astounding to say the least.

    Public sector unions often like to point out excessive CEO and mgmt pay in the private sector(which I don't disagree with) but this is just deflection because the number of union employees on the dole far outnumbers private sector mgmt and with private sector an investor has the choice to not invest in those firms whereas with public sector the backroom deals between unions and pols are forced onto the public. That said, voters control the politicians who make the deals with the unions so the electorate gets the politicians and public sector benefits they deserve (or pay for if they're not politically engaged).

    All that said, back to the original topic if the federal govt. defaults on the federal debt haircuts on SS/Medicare and FDIC insurance will be the least of the problems for all.

  • edited January 2023
    @stayCalm Here's just one popular public sector union punching bag for the rightwing and what their starting salaries and final salaries average by state and nationwide: https://nea.org/resource-library/teacher-salary-benchmarks
    As far as I'm concerned, they're underpaid for the difficult work they do and I don't think they are "on the dole" in most cases. And last I checked the salaries for less difficult work are higher in the private sector. It's one reason it is so difficult to recruit and retain teachers long-term.
  • Politics and optimism aside, let’s go back to the original posters not unreasonable question. What to do if you believe the worst about to happen? Particularly if one is a late in life investor with not a lifetime to recover from a house freedom caucus induced catastrophe.
  • edited January 2023
    Gold and out of the money put options or a collared options strategy for your stocks. Perhaps a bit of the stablest foreign currencies that might rally if the dollar collapses. Again, a highly unlikely scenario. But S&P 500 options are in effect insurance contracts. A number of funds buy the out of the money S&P 500 put options to hedge against "fat tail risk" as out of the money ones that only are profitable during significant downturns tend to be cheap to buy and can even be financed by writing call options on your stocks--a collared strategy. Of course, there is also counterparty risk with options, so the Options Clearing Corporation which settles options trades would have to step in the event of member defaults, and much like with the FDIC who knows what would happen if Treasuries defaulted. Perhaps the OCC would go bust too, really apocalyptic fat-tail scenario.
  • edited January 2023
    FYI, here are some excerpts from an article in today's NYT: How Close Is the U.S. to Hitting the Debt Ceiling? How Bad Would That Be?

    "Strategists across Wall Street have sent out a raft of research assessing when the United States will exhaust its ability to stay under the debt limit — what’s known as the X-date — and how a default might ripple through asset classes.

    T.D. Securities analysts think that the credit rating on U.S. debt is likely to be lowered if negotiations go badly, which could spook some investors. S&P Global Ratings downgraded U.S. debt in 2011, but other major rating agencies still award the sovereign their top assessment. They also expect that people will sell out of risky assets like stocks if a default occurs, while actually piling into some Treasury bonds.

    In the month before the debt ceiling was raised in summer 2011, short-dated government bonds called bills swiftly fell in value, pushing their yield — indicative of the government’s cost of borrowing for three months — sharply higher. Stock prices fell, and the 10-year Treasury yield moved in the opposite direction, in part because it was still seen by investors as a safe place to park their cash.

    Some investors have begun to look into protection in case the United States does renege on its debts. One trader at BNP Paribas recently sent some investors prices for U.S. credit default swaps, which provide some insurance in return for a small premium, paying out any money they lose if the government does not pay them on time. Such a price list is rare, with interest in protection on American debt usually low given the unlikeliness of default. The price of these contracts has steadily risen over the past six months, implying a higher, though still small, likelihood of a debt ceiling breach."
  • edited January 2023
    Credit default swaps could work in the short-term if a T-bill skips a payment, but would likely be disastrous in the event of a full on default as all of the counterparties to the swaps, which invest heavily in Treasuries themselves, would probably collapse as well. If you enter a CDS contract with BNP Paribas to pay if T-Bills fall, you are essentially depending on the credit quality of BNP Paribas to fulfill its role as counterparty to pay you every time the T Bill declines in value. It's like buying a BNP Paribas bond, and you're hoping that BNP Paribas's credit quality is superior to Treasuries.
  • edited January 2023
    CDS payouts are never quick.

    A CDS Special Committee has to determine and declare the default first and then anyone gets paid on CDS.

    The idea that some T-Bills CDS may be paid quickly while other T-Notes/Bonds may take a while isn't really correct.

    Just look at how the Russian default mess progressed.

    Russia missed bond payments in April 2022, then a grace period kicked in and that went by May 2022. But in June 2022, the US-OFAC issued clarification on what was meant by the Presidential Executive Order prohibiting dealings with Russian stocks and bonds, and the CDS Committee deferred its determination in June 2022, then in July 2022. In August 2022, some members of the CDS Committee quit and it no longer had a quorum for meeting. Finally, in September, some CDS contracts settled for 44c on $1.
    https://www.jdsupra.com/legalnews/settlement-of-credit-default-swaps-4470588/
    https://www.ifre.com/story/3493591/shrinking-cds-committee-raises-questions-over-markets-future-brtlddgldd
    https://www.ifre.com/story/3512897/russia-cds-finally-settles-following-auction-y6tvhqv2yh

    https://www.cdsdeterminationscommittees.org/
  • Important to remember the intent of why legislation forcing debt limits was created in the first place. Eventually the make up of actors involved will force change. Government does not have a mindset of cost control like other entities within the US. Dalio has some great videos on human nature and how history repeats itself in the matters of world power/Federal debt. There is nothing new under the sun.
  • edited January 2023
    @shipwreckedandalone I wonder if the T-Rexes and other dinosaurs, when they spied the Chicxulub asteroid descending towards them during the Cretaceous period, thought, "There is nothing new under the sun." Or if the Neandertals thought that when they saw the homo sapien tribes approaching? Or when a Sumerian King first saw a wheel rolling towards him in Mesopotamia? Or what the royals in Europe thought of American and French democracy? Or what the Newtonian physicists thought when they first heard of Einstein's quantum mechanics? Or what the editors of NewsWeek were thinking in 1995 when they published an article titled "The Internet? Bah!", which reacted against the idea that this silly digital blip was going to infiltrate and replace elements of our everyday lives? This screen we're all staring at right now is something very new under the sun historically speaking and it has radically altered life as we know it. Why is it guys like Dalio think only entrepreneurs can be innovative and change history--hint, too much Ayn Rand--but governments or ordinary humans can't? Yes, history is cyclical, but it also progresses, for better and for worse. Today, for instance, individual rights are better worldwide than they were 1,000 years ago, but our environment is so much worse. Both of those facts require new ways of thinking, about government and commerce especially.
  • Thanks for your thoughts Lewis.
    Each of those concepts you mentioned were new discoveries (not inventions). IOW's new to man but not new to Earth's physics and capabilities under our sun since day one. But 'nothing new under the sun' refers to human nature (fear and greed and selfishness) which will never change and has us in the boat we are in today. $245,000 in debt per remaining US taxpayer. The last inflationary cycle in the 70's had Federal debt at <$1B and today's possible higher interest rate cycle (and along with it the upcoming problem of interest expense) with today's debt of $31T. I hope we emerge.... but the math is not encouraging. Dalio's work focused on 500 years of the history of capitalism and how debt always is the culprit in falling empires. Thus, history repeats itself. Reserve currency has enormous power.
  • edited January 2023
    The wheel and democracy were/are inventions, as is capitalism. Humans are still greedy and fearful, but far more organized and less violent than we have been in the past. Debt would be less or non-existent if this were taxed appropriately:
    image
  • MAGA party should come up with a new budget for the future with provision for surplus to pay the debt since debt was not created by Democrats only. Majority of times, budgets are passed by both parties together.
  • Keep in mind that all that matters is debt as a function of (percentage of) GDP and growth. Can we grow out of it, as in the past?

    https://www.ceicdata.com/en/indicator/united-states/total-debt--of-gdp

    Highest was ~2y ago.
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