US Default Could Leave Investors Nowhere to Hide (2024)

FAQs

US Default Could Leave Investors Nowhere to Hide? ›

The market-implied probability of a U.S.-government default stood at 3.5% on May 23, as investors still viewed the possibility of such a default as a tail event. But the consequences of a default could be severe and long-lasting.

Financial market volatility: A default could trigger significant volatility in financial markets. Investors might panic, leading to a sell-off in Treasury securities, which are typically considered one of the safest assets.

The dollar is a global reserve currency and U.S. bonds are seen as one of the most stable investments on the planet. So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates.

Money market accounts are worth considering as well; they're FDIC-insured, and combine features of checking and savings accounts. U.S. government securities—such as Treasury notes, bills, and bonds—have historically been considered extremely safe because the U.S. government has never defaulted on its debt.

Some investors are turning to gold as a safe haven as the U.S. gets closer to hitting the debt ceiling because the metal is a long-time hedge against instability, according to Bloomberg, citing an investor poll from early May.

Tried and true basics. "We're advising people to prepare for a potential default as you would for an impending recession," says Anna Helhoski of NerdWallet. That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses.

She added that the Treasury might reduce the payments — maybe to 50% or 75% of what's been promised. “It could take both approaches. Which one it takes depends on what executive branch officials decide, and they will likely prioritize creditors and recipients of entitlement programs,” Erkulwater said.

If the security accounts for 0.5 percent or more of the fund's portfolio, the fund also must report the default to the SEC. In addition, the US government's failure to pay its obligations could trigger a severe downgrade of its short-term credit rating by NRSROs.

Yes. Treasury can roll over maturing coupon securities on the maturity date without affecting its outstanding debt or remaining cash balance as long as it makes the coupon payment due on the same day, according to JPMorgan. Treasury bills are more complicated as they are sold at a discount and then repaid at par.

A U.S. default could downgrade the country's credit rating, which means an increase in risk. With the increased risk, there would be increased interest rates. Since debt ceiling talks came into focus this month, the yield on the US 10 Year Treasury, which is the mortgage benchmark, has gone up from 3.31% to 3.74%.

What to buy if the U.S. defaults? ›

“Gold and other precious metals have traditionally been viewed as safe haven investments during times of economic turmoil,” he says. “If the debt ceiling is not raised and the government defaults on its debt obligations, investors may turn to gold and other precious metals to protect their wealth.”

While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.

The odds of the U.S. government missing its debt ceiling deadline have reached about 25% — and the chances are rising by the day, according to a new estimate by JPMorgan Chase experts.

We estimate that the U.S. debt held by the public cannot exceed about 200 percent of GDP even under today's generally favorable market conditions.

If the U.S. government defaults, we'll probably see a quick pull-back and then a very strong push upward in the crypto market." The crypto currency market has followed cyclical patterns and while 2022 was "quite painful", it is recovering this year and 2024 will be "another exponential year", Smith said.

If the security accounts for 0.5 percent or more of the fund's portfolio, the fund also must report the default to the SEC. In addition, the US government's failure to pay its obligations could trigger a severe downgrade of its short-term credit rating by NRSROs.

Historically, the level of U.S. debt has had no correlation with the performance of the stock or bond markets. U.S. federal government deficits and debt levels have risen steeply since the pandemic, raising concerns about the impact on the economy and financial markets.