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Debt Ceiling and US Treasury Investments

edited January 2023 in Fund Discussions
A poster on the Big Bang Forum posed the following question:

"After watching the House elect a Speaker, I now have concerns holding US Treasuries and Treasury/Government backed investments.

From all accounts it appears the debt ceiling will need to be raised before or during Q3-2023 of we will face a default.
I have serious concerns that the current makeup of the US House can do what is necessary to avoid a default.

I now have concerns with holding funds in Treasury or Government Money Market Funds.
I am looking for alternatives as to where I can place these funds. Looking for options - do you have any."


Since I have similar concerns, I decided to re-post the question on this forum.

Would, for example, FDIC insured CDs be a place to hide out from a US government default?

Let's discuss possible options, especially in the area of money market funds. But, please keep politics out of it.




  • If the U.S. defaulted on Treasury bonds, everything would decline significantly except perhaps gold. It would be a disaster for capitalism as we know it of epic proportions. Even looking at history as a guide isn’t accurate because securities markets are much bigger and far more interconnected than they once were. CDs would not work and the FDIC would be overwhelmed by bank defaults.
  • @derf Thanks for npr post. While technically a "default", forgetting to cut the checks is somewhat different than refusing to pass legislation that allows the Government to borrow the money needed to continuing to function. Note however that even this 1979 default raised interest rates substantially. A similar increase today, with the debt we have would be much more onimous.

    I agree with Lewis and believe that the consequences are so dire that no rational person would contemplate it.

    Once it was resolved, presumably the FDIC would be able to pay out your CD if the bank defaulted, just like the government would eventually pay the principal and interest on the bonds, so I don't think there is any real benefit from moving to CDs from Treasuries for example.

    The shock to all assets, except maybe Gold, would be extreme, so if you think this really might occur, you should be in Gold, cash under your mattress ( Banks will probably shutter so safe deposit box not accessible; I assume ATMs will stop working) and inverse funds as the Market will crater. Foreign funds and currencies should go up, but the shock will be so overwhelming I would not buy Euros for example.

    Even the hint that the GOP will seriously attempt to prevent the ceiling from being raised will cause a massive correction. That will surely scare them into voting for the simple majority that will be needed to pass it, as will the inundation of their offices with angry constituents who have no Social Security check, or whose Medicare cards are declined in the Emergency Room and who can't get any cash to buy groceries.

  • Since nothing is really safe as described earlier, let’s try and assume there is possibly something. German t bills? Apple or Exxon short term bonds? It’s usual difficult to buy such optionality. Difficult in buying and selling. Tax consequences. Assuming all that is acceptable it’s worth considering.
  • edited January 2023
    If safety is the primary concern, I would see no reason for favoring German Bonds, Exxon or Apple over Treasury bonds and T-Bills in particular. If T-Bills failed because of financial terrorists holding our government hostage, every other securities market will go down with them. There is a reason why T-bill interest is called the “risk-free” rate. The only hedge in such a disastrous environment would probably be physical gold.
  • "no rational person would contemplate it"

    But the people contemplating it are the same Trumpist partisans who not only contemplated, but in some cases supported, the January 6 attack on the United States Congress. They may not be rational, but they are extremely dangerous.

  • We are talking about repuglicans, so by definition we are not talking about rational people. Thinking that no rational person would would contemplate not raising the debt ceiling means that is EXACTLY what the HFC and other repuglicans will do. To think otherwise would be foolish and naive. I welcome a discussion on how to prepare for the worst.
  • Lyrically speaking, one may call such a congressional folly the 'Hotel California Syndrome'

    Last thing I remember, I was
    Running for the door
    I had to find the passage back
    To the place I was before
    "Relax, " said the night man
    "We are programmed to receive
    You can check out any time you like
    But you can never leave"

    'Course when the SS payments are not deposited and other numerous gov't. functions stop; the emails and phone calls overwhelm the systems and they crash. Then the re-do begins.....
  • edited January 2023
    "I agree with Lewis and believe that the consequences are so dire that no rational person would contemplate it."

    .....Ahem. Remember, you're dealing with the US House of Representatives.

    OJ, larryB and catch22 nailed it with their own remarks, above.
  • edited January 2023
    I'm inclined to agree with sma3 only because it's important to remember that the entire Congress also has significant amounts of money invested in stocks and bonds, and would stand to lose "bigly" in the event of a default. How does the value of the Constitution, our democracy and human life on January 6th compare for them to that of their investment portfolios? It would be like a pilot of an airliner intentionally taking a nosedive. Yet brinkmanship is going to happen a lot to starve every social program, even if an actual default doesn't.
  • LB: "brinkmanship is going to happen a lot to starve every social program, even if an actual default doesn't."

    true. playing games with people's plans, people's budgets, people's LIVES.
  • I agree that the repugs will play games to starve needed programs. Oddly enough most of the folks who vote for them will be the losers … they vote against their own economic interests to air their petty grievances. But starving programs will be a slow moving train wreck but a train wreck none the less. I used to strongly disagree with the Republican Party but now I fear and loath their cruelty and destructive policies.
  • edited January 2023
    I think what happened with McCarthy is just a prelude of the new regime here, and I expect the moderates in the GOP and many Dems to yield in this game of chicken every time because they don't want calamity. It will be up to voters to push back if they don't want these kinds of standoffs to constantly occur. You could also say the fact that there wasn't the promised "red wave" could also be a prelude of more losses for the GOP over the long-term if they don't stop some of this nonsense. My impression is the more old-school Republicans don't like this behavior either.
  • I'm going to repeat something here that I posted over in an Off-Topic thread:

    The Democrats are going to be the very least of McCarthy's problems. For a truly somber overview of the legislative minefield laying ahead, I highly recommend pulling up last night's Brooks and Capehart segment of the PBS NewsHour. I was very impressed with the reportorial exchanges between Amna Nawaz, David Brooks, and Jonathan Capehart. A very professional crew indeed. NewsHour has certainly landed on it's feet with the transition from Judy Woodruff.
  • edited January 2023
    Certain members of the House are obstructionists/opportunists.
    They are not there to help their constituents or to make this a better country.
    I presume this crew will take advantage of debt ceiling negotiations to steal the spotlight,
    make false claims, and offer untenable solutions.
    A technical default (US government is late paying some of its debt) may be a potential outcome.
    A true default will not occur as all creditors will be paid in full.
  • edited January 2023
    Default is when bills are not paid when due.

    Why it occurs doesn't matter - the lack of ability or will or willingness to pay. Technically, there is also a grace period of a few days or weeks, but in case of debt-ceiling crisis, the max damage may be after the initial trigger.

    Also, the time for theatrics is when spending bills are approved, not when payments are due.

    History of 2011 should be reviewed. Markets started to fall in July 2011 after months of impasse on debt-ceiling but there was a final drop-dead date in early/mid-August 2011. The House finally passed the bill on 8/1/11, the Senate on 8/2/11, but lot of damage to the markets (stocks, not bonds) had already occurred. Then, after the immediate crisis had passed over, the dimwitted S&P/McGraw-Hill downgraded the US sovereign debt on 8/5/11, creating another crisis. As the history shows, no other rating agency dared to follow the S&P, and McGraw Hill was severely punished (in the markets) by that fiasco - it doesn't exist in its then-form anymore. 29, 2011: The Budget,a vote of 218–210.

    Chart for 2 months in 2011, 7/1/11-8/31/11.

  • edited January 2023
    Hi @yogibearbull
    I was rechecking similar info, including the Wiki write which provides a decent review. We were on vacation in northern Michigan when the markets burped, and no access to online; when I read the news of the markets drop, and have this short period stuck in my brain cells. The GFC of 2008/2009 was still fresh in many investors minds and Europe had not yet had a well functioning plan for recovery.
    I fiddled around with a chart of SPY, AGG and IEF for a quick look of a 1 year period.
  • Thanks for charts YBB and catch22

    I have not had the patience to read the entire 55 page House resolution that apparently has to be passed Monday for the HR to open, but as I understand it, it is the source of the power and obstruction that the radical fringe GOP now controls.

    I hope someone better versed in HR policies than I can chime in, but it would appear to me that since only one member can now call for the Speaker’s ouster, if 212 Democrats and 6 moderate Republicans collaborated in the crisis they could

    kick out McCarthy
    elect a moderate Republican who pledges to pass a budget and the debt ceiling, and other reasonable items including a redo of the rules with power to control the fringe ( who could not retaliate if the coalition held firm)

    People say no Republican would dare collaborate, but there are 18 elected from districts Biden won, and there are certainly several with principles as we saw during the impeachment trial, so I do not think it is impossible if things get really dire.

    Given the reaction of the GOP to Gaetz ( the walk out when he was speaking and the near physical altercation) I hope they are close and realize this may be the end of them as a party

    I have a friend who used to be. a HR staff lawyer who I will reach out to.
  • edited January 2023
    Some comments on this from Randall Forsyth this week:

    ”In the narrow, parochial terms of the stock market, the precedent of the vicious fight over the debt ceiling in the summer of 2011 coincided with a 10%-plus drop in the S&P 500 index. The fight culminated with Standard & Poor's downgrading Uncle Sam's credit by a notch, from the top rating, AAA, to AA-plus. ‘The downgrade reflects our view that the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenge,’ the ratings firm said at the time ….

    Ironically, the 2011 downgrade spurred a rally in Treasury prices and a drop in yields, in a typical flight-to-quality move by investors. Since then, extraordinary schemes to stave off default have been floated, such as having the Treasury mint a $1 trillion coin, which would be accepted at the Fed, and in turn pay off debt obligations.”

    Excerpted from ”Up & Down Wall Street”, Barrons - January 9, 2023

    Folks - I don’t have a firm opinion on this situation yet. Let’s see how things evolve. Have lived through these episodes before. Govt has always found a way to continue functioning. As a lot of the posturing relates to a wider political agenda I prefer to steer clear myself or address those OT. The OP was pretty specific in asking about investment related consequences.
  • Unnamed Big Bang Poster: "I now have concerns with holding funds in Treasury or Government Money Market Funds. I am looking for alternatives as to where I can place these funds. Looking for options - do you have any."

    I don't personally share those concerns, and consider this statement an exaggerated response to the recent theatrics of selecting a Speaker of the House. It would be catastrophic to cause a government default, and no party wants to be responsible for not approving a budget to prevent that.
  • dtconroe said:

    It would be catastrophic to cause a government default, and no party wants to be responsible for not approving a budget to prevent that.

    The "Hive Mind" has a curious way of deflecting blame...I can hear Kevin McCarthy now..."Accede to my demands or the blame for government default will be on YOUR hands". The only question remaining is what those demands would be.
  • edited January 2023
    "it would be catastrophic to cause a government default, and no party wants to be responsible for not approving a budget to prevent that."

    But it's not a question of a "party" approving a budget, is it? It's the reality of some twenty anti-government nihilists who want nothing more than to bring the government, as it now exists, completely to it's knees; and who have nothing but contempt for the mainstream Republican party.

    That small group of anti-intellectual subversives could care less about the economy or anything else. That was clearly demonstrated on January 6, 2021, and hasn't changed one bit. Trump didn't invent these people, but he certainly used them to his own ends.
  • Truth, OJ.

    As I've said before: Republicans, Lincoln and Eisenhower, are spinning in their graves. Lots of others, surely, too. Coming from Massachusetts, I note that State's willingness to elect Republicans, despite ALWAYS voting Blue at the national level on the ballot. Charlie Baker just finished his gubernatorial term. A Republican. A SENSIBLE Republican. I dunno why the likes of Charlie Baker put up with the nihilists. ..... Here in Hawaii, The State is so deeply Blue that politicians know they have zero chance of winning as a Repugnant. So, they are all Democrats. 99%, anyhow. Which means that tent is VERY big, and includes all sorts. So then... What does it MEAN to be a Democrat in Hawaii? The field is wide open... And remember Tulsi Gabbard, "Democrat?" The Hawaii State Dem. Party recently revoked her membership, after she started speaking at conservative/Repugnant events.

    Investments? The US is still the least ugly place to invest.
  • Just in case of a budget shutdown, default ,where to be invested ? Gold ,metals, bonds as in gov. bds. ?
  • edited January 2023
    If there is an actual default there will be no safe havens except possibly gold.
    I don't anticipate a default although I assume there will be plenty of drama regarding debt ceiling legislation.
    I'm not making any tactical portfolio changes in response to the situation.

    "If Congress were to ever allow the debt ceiling to lapse and Treasury was forced to default, the consequences would be severe. Interest costs throughout the world would likely increase. Investors would demand higher rates on future Treasury bonds, increasing the interest costs to taxpayers. There would likely be ripple effects throughout the financial system that would increase interest rates on mortgages, student loans, car loans, credit cards, and other debt. A long impasse could prompt a financial crisis and ultimately threaten the US Dollar’s central role in the global financial system. All of this could trigger a severe economic depression, bringing job losses and serious hardship to millions of families in the United States and around the world."

    "There is a debate about whether the debt ceiling is useful or needed. Some argue that the debt ceiling is outdated, given the central role that Treasury debt now plays in the global financial system and that we now have a formal congressional budget process that gives Congress a regular opportunity to review and modify overall fiscal policy. Eliminating the debt ceiling would prevent Members of Congress from threatening the full faith and credit of the United States and holding our economy hostage in order to force action on other legislation, and it would allow fiscal debates to take place without the threat of a looming financial crisis. Others argue that Congress should retain control over the debt ceiling as a matter of Congressional prerogative."


  • Gotta have limits. Gotta!
  • edited January 2023
    @Observant1 +1 That analysis of the consequences seems correct. The U.S. has the largest most important securities' markets, and those markets are based off the "risk-free" rate of T-Bills. Every bond issued is priced at a certain spread above T-Bills or other Treasury bonds. If T-Bills somehow fail, everything else fails with it. Spreads on bonds would widen enormously, and equities would get crushed, too, especially U.S. equities as investors would lose faith in our nation. Yet I would maintain that despite the current political situation, this is a highly unlikely scenario. I think there will be brinkmanship, pushing things to the edge to make demands, but not going over the edge to actual default.
  • Brethren, let us now pray.
  • edited January 2023


    Yet I would maintain that despite the current political situation, this is a highly unlikely scenario.
    I think there will be brinkmanship, pushing things to the edge to make demands,
    but not going over the edge to actual default.


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

    2 examples:

    In September 2008, when the Treasury and the Fed decided to let Lehman go, EVERYONE went to sleep thinking that EVERYTHING foreseen had been taken care of and those were controllable. But NOBODY saw that the next day a run on the Reserve Primary money-market fund would start because it was holding lots of Lehman paper, and cascading market event started. The US had to promise to the Europeans later not to let stuff like Lehman ever again.

    In August 2011, EVERYONE (Congress, WH, markets) thought that crisis was over because the debt-ceiling was passed in the last hours of August 1 (the House) and August 2 (the Senate) and stuff was signed off by the President. But then came the S&P downgrade of the US out of the blue on August 5, and the crisis spilled all over.

    Stuff like this can happen when things are taken to the brink thinking that things will work out every time.
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