Investment bank clients are peppering Wall Street with questions about what happens if the US Treasury in coming weeks runs out of cash and does the unthinkable — failing to make payments due on Treasury securities, the bedrock of the global financial system. …
One school of thought is that the impact might not be so damaging. After all, since the 2011 debt-limit crisis, market participants have worked out a process for dealing with the Treasury announcing that it couldn’t make an interest or principal payment.
But JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon warned earlier this month that even going to the brink is dangerous, with unpredictable consequences.
“The closer you get to it, you will have panic,” he said in a May 11 interview with Bloomberg Television. “The other thing about markets is that, always remember, panic is the one thing that scares people — they take irrational decisions.”
And even a key group that helped to compile the emergency procedures, the Federal Reserve Bank of New York-sponsored Treasury Market Practices Group, has issued its own caution.
“While the practices contemplated in this document might, at the margin, reduce some of the negative consequences of an untimely payment on Treasury debt for Treasury market functioning, the TMPG believes the consequences of delaying payments would nonetheless be severe,” it said in its December 2021 gameplan.

“We are likely to see localized dislocations in the event of missed payment,” if that were to happen, JPMorgan rates strategists, co-led by Jay Barry, wrote Friday in a Q&A for clients on a technical default.
RBC Capital Markets strategists, also writing Friday, said they “doubt” a downgrade would trigger any forced reallocation by fund managers away from Treasuries.
At the same time, RBC’s Blake Gwinn and Izaac Brook cautioned that the “back-office issues” of delaying payments “could very easily bleed into the front-office, causing disruptions to liquidity and market functioning.”
The TMPG noted that firms holding Treasuries in custody for other financial institutions tend to advance payments scheduled for those securities, and would need to sort how to proceed if those payments weren’t received from the Treasury on time.
Firms that offer pricing on Treasuries could run into challenges, “such as setting the price of a Treasury subject to a delayed payment to $0,” the group said.
Some market participants “might not be able to implement” the contingency plans, “and others could do so only with substantial manual intervention in their trading and settlement processes, which itself would pose significant operational risk,” the TMPG said.

This is certainly not our modal view, but in the unlikely event of a technical default, we think Treasury yields would decline and the curve would steepen. This seems unusual in the context of a default, but Treasuries have rallied into the latter stages of other serious debt ceiling debates in 2011 and 2013.

Treasury can, in principle, delay coupon or principal payment dates. If Treasury announces its intention to postpone a payment date in advance (the day before the payment is due), the security will remain in Fedwire, and would therefore still be transferable. …
If Treasury fails to notify investors of its intent to delay a principal payment due the following day by approximately 10:00 PM, the security in question will drop out of Fedwire, and such defaulted security will not be transferable. If (only) a coupon payment is missed, however, the underlying security is still in the system and remains transferable. ...
The status of Treasury collateral depends on the timing of Treasury’s notification of any delays in payments. If done in the timeframe discussed earlier, the security remains in Fedwire and is still transferable. As a result, it could in principal be used as collateral for repo and derivatives transactions, although possibly with higher haircuts.
If notification deadlines are not met, particularly for principal payments, that particular security is dropped out of the system and is no longer transferable, and as a result, cannot be used as collateral. It is possible that an OTC market may develop for securities that drop out of the system, but the likelihood of such an outcome is unclear at the present time.
Since Treasury securities do not have cross-default provisions, other Treasury securities that have not had a delayed/missed payment will remain transferable on Fedwire and can therefore continue to be used as collateral. ...
Under the US non-cleared margin requirements (NCMR) finalized by CFTC and prudential regulators, Treasury securities are considered eligible collateral even in the case of a missed payment. However, this is not the case under the UK and EU NCMR regimes. Thus, for any transactions facing counterparties in those regions, defaulted Treasury securities would be assigned zero collateral value, requiring the swap counterparty to substitute or post additional collateral. …
We believe the Federal Reserve will accept defaulted Treasuries as collateral at the discount window.

• 1) I assume that they are basically correct not to be too worried about the plumbing. We have been having debt-ceiling crises every few years for ages now, and surely everyone has war-gamed this out over and over again. Financial markets are not full of idiots, and it would be annoying if this extremely predictable and predicted event brings down the global financial system through some technicality.
• 2) That said, I assume that with, like, 85% confidence. There is a lot of stuff out there. Surely the biggest global banks and asset managers have gamed out how they will keep markets going in the event of a US default, but is there some smaller firm whose computers will say “Treasury price = $0” and cause chaos? Maybe!
• 3) If you work in some corner of financial plumbing that you think won’t work in the event of a default, please do let me know! Send me an email. Also, though, fix it? You still have a little bit of time, and you’ve had plenty of warning.
• 4) Wouldn’t it be so tiresome to work in financial plumbing at some big bank and have to go to all the meetings about this stuff? To have to build all the systems to deal with a US government default, just because the US government can never get its act together to get rid of the debt ceiling, and because debt-ceiling negotiations always have to go to the last second? Like imagine pulling the all-nighters at JPMorgan to prepare for this, scrambling to save the US government from the consequences of its own incompetence and malice, and meanwhile the Securities and Exchange Commission is fining because sometimes you text your colleagues about work. Just pay your debts, come on.

@fred495...question if you are comfortable answering...how much of a change meaning your 100% Treasury MMKT and FDIC CD portfolio from your past portfolio...were you very heavy in those investments prior and if so what % of your portfolio?
FWIW...I've been 85-90% for many years in those types of investments....now ~ 95%...."stop playing the game if you feel you've got enough...don't get greedy...get your portfolio where you can sleep well at night" I'm still working and do I guess you would say better than average out there...working for the "fun of the game, camraderie and challenge.."
...who the heck knows though right?
Good Luck to ALL,
Baseball Fan

Patience sometimes pays off, eh, @hank? I've been tracking Brother Industries out of Japan. BRTHY.
https://www.stockrover.com/research/insight/summary/quotes/BRTHY

@dtconroe what makes a banking account (checking and savings) more liquid than a money market fund at the likes of Schwab?

Several Matthews Asia funds were mentioned.
I personally would stay away from all Matthews Asia funds in the near-term (possibly long-term).
There has been an exodus of talent at the firm over the past few years.
https://www.mutualfundobserver.com/discuss/discussion/comment/152046
https://www.mutualfundobserver.com/discuss/discussion/comment/156101
https://www.mutualfundobserver.com/discuss/discussion/comment/159415

Have you looked at Matthews Asia ETFs?
Unrelated, but I recently switched MATFX (w/painful distributions) to MINV.
https://www.matthewsasia.com/funds/etfs/

[snip]
Now the problem for me with locking up money in a CD is that it limits my ability to move in and out of what I believe are more profitable investments while that money is tied up. I’ll take the 4+% on cash Fido currently pays in return for being able to pick up equities anytime I want. While you’re tied up in a 3 year or 5 year C/D some hard assets or equities you watch could fall by 25%, making them an attractive buy. Do the math and you’ve actually lost money if you buy those assets a few years later after the prices have rebounded, even considering your “profit” from the C/D. When you lock up cash for any length of time you pay an opportunity cost.
[snip]