What will happen to BND if US default?

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vchiu25
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What will happen to BND if US default?

Post by vchiu25 » Wed Oct 09, 2013 2:21 am

Hi,

Just curious what will happen to BND if US default? Does BND still provide adequate protection as portfolio anchor in this case?

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Aptenodytes
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Re: What will happen to BND if US default?

Post by Aptenodytes » Wed Oct 09, 2013 4:15 am

1) There are many possibilities

2) Yes

Your goal in constructing a portfolio is packed with enough Yeses to your 2nd question so that you don't even need to ask the 1st. The more you ask the 1st the more you will doubt your answer to the 2nd, and that path leads to ruin.

Your portfolio is an expression of your faith in the long run. Focus on that, not today's hyperventilation.

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Rob54keep
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Re: What will happen to BND if US default?

Post by Rob54keep » Wed Oct 09, 2013 5:05 am

Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!

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Re: What will happen to BND if US default?

Post by Texas hold em71 » Wed Oct 09, 2013 6:58 am

Aptenodytes wrote:1) There are many possibilities

2) Yes

Your goal in constructing a portfolio is pack it with enough Yeses to your 2nd question so that you don't even need to ask the 1st. The more you ask the 1st the more you will doubt your answer to the 2nd, and that path leads to ruin.

Your portfolio is an expression of your faith in the long run. Focus on that, not today's hyperventilation.
1. You would think people would flee bonds and therefore BND would drop. But you really cannot predict what will happen because investors (like me) may believe that the "default" is only temporary. In the last showdown, investors fled TO treasuries even when Congress was threatening to default.

2. I don't think any investment will cushion the blow of default. Everything will drop. It will come back as soon as the crisis is over ( or reasonably soon thereafter). The question is can you ride it out? If you cannot, you should not be investing in the first place. But remember, FDIC deposits are backed up buy the government ultimately. There really is no safety. Just a continuum of safety.

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Re: What will happen to BND if US default?

Post by Sbashore » Wed Oct 09, 2013 10:08 am

Rob54keep wrote:Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!
I agree with this. I think the cash flow needed to pay debt interest is approximately 1/10 of the revenues per month. I've also heard that payment of US Debt interest is automatic.
Steve | Semper Fi

manwithnoname
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Re: What will happen to BND if US default?

Post by manwithnoname » Wed Oct 09, 2013 10:42 am

Rob54keep wrote:Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!
That idea comes from the belief that the US can continue to pay interest on US debt because it is saving $24B a month by not paying federal workers.

Problem is that some days Treasury needs $30 to 50B just pay some govt debt. Treasury needs $24B on 3rd and another $24B on the 4th Wednesday of each month to pay SS benefits. SS payments, Medicare and Vets benefits on Nov 1 will be $75B. Tax revenue will not cover it.

What drives the financial markets is the fear that the US may default at some point after the 17th so investors will begin withdrawing from treasuries before that date which will unravel the financial markets.

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Re: What will happen to BND if US default?

Post by mikem » Wed Oct 09, 2013 10:54 am

manwithnoname wrote:
Rob54keep wrote:Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!
That idea comes from the belief that the US can continue to pay interest on US debt because it is saving $24B a month by not paying federal workers.

Problem is that some days Treasury needs $30 to 50B just pay some govt debt. Treasury needs $24B on 3rd and another $24B on the 4th Wednesday of each month to pay SS benefits. SS payments, Medicare and Vets benefits on Nov 1 will be $75B. Tax revenue will not cover it.

What drives the financial markets is the fear that the US may default at some point after the 17th so investors will begin withdrawing from treasuries before that date which will unravel the financial markets.
Default will require priorities set to meet certain obligations. S/S benefits, Vet payments, Medicare will probably come before interest payments. I don't believe this will bode well for the overall market. You could view this as an opportunity to rebalance :shock:

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Re: What will happen to BND if US default?

Post by manwithnoname » Wed Oct 09, 2013 11:20 am

mikem wrote:
manwithnoname wrote:
Rob54keep wrote:Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!
That idea comes from the belief that the US can continue to pay interest on US debt because it is saving $24B a month by not paying federal workers.

Problem is that some days Treasury needs $30 to 50B just pay some govt debt. Treasury needs $24B on 3rd and another $24B on the 4th Wednesday of each month to pay SS benefits. SS payments, Medicare and Vets benefits on Nov 1 will be $75B. Tax revenue will not cover it.

What drives the financial markets is the fear that the US may default at some point after the 17th so investors will begin withdrawing from treasuries before that date which will unravel the financial markets.
Default will require priorities set to meet certain obligations. S/S benefits, Vet payments, Medicare will probably come before interest payments. I don't believe this will bode well for the overall market. You could view this as an opportunity to rebalance :shock:
Prioritizing payments is highly unlikely because treasury has no way to sort out the 80 million payments made each month to find ones that it wants to prioritize on a certain date.

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Re: What will happen to BND if US default?

Post by MnD » Wed Oct 09, 2013 11:46 am

Rob54keep wrote:Officially the US will NOT default. Those are only scare negotiation tactics. The US has plenty of daily/monthly cashflow to meet its interest obligations.
Stay the course!
That's extremely dangerous thinking. If you think this country will and should pay China over disabled veterans, seniors with no other income sources, small business contractors etc. I suggest you write a video game where that could be the plot for your own entertainment as opposed to actually promoting it as some people are doing. Ordering is highly unlikely to happen, nor can we predict how the market for treasury bonds will react if the US begins to default on 100's of thousands of other obligations outside of interest on securities. Every corporate and investment leader in the US and overseas that has spoken out has warned against this.

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Re: What will happen to BND if US default?

Post by livesoft » Wed Oct 09, 2013 2:59 pm

It might be interesting to find out what will happen though. That way, folks won't have to guess the next time.
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Re: What will happen to BND if US default?

Post by Ged » Wed Oct 09, 2013 3:03 pm

livesoft wrote:It might be interesting to find out what will happen though. That way, folks won't have to guess the next time.
There are a lot of things that make interesting history that you wouldn't want to personally live through. :shock: :shock: :shock:

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Re: What will happen to BND if US default?

Post by Rupert » Wed Oct 09, 2013 3:21 pm

livesoft wrote:It might be interesting to find out what will happen though. That way, folks won't have to guess the next time.
Remember what happened when they stopped pushing the button on Lost? Don't stop pushing the button!

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Re: What will happen to BND if US default?

Post by z3r0c00l » Wed Oct 09, 2013 3:32 pm

Ged wrote:
livesoft wrote:It might be interesting to find out what will happen though. That way, folks won't have to guess the next time.
There are a lot of things that make interesting history that you wouldn't want to personally live through. :shock: :shock: :shock:
May we live in interesting times.

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Re: What will happen to BND if US default?

Post by hsv_climber » Wed Oct 09, 2013 3:40 pm

Considering that yield on US bonds did not rise in Oct. despite all the talks, we should assume that collective market wisdom does not believe that anything bad should happen to BND.

OTOH, I am surprised that stock market has not lost more than it did. Unlike bonds, stocks have real danger, since all US companies, that are doing business with the government in one way or the other, are currently losing money. That should effect ALL government contractors, and ALL service-related businesses. There will be real profit losses for many businesses in the 4th quarter.

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Re: What will happen to BND if US default?

Post by Jack » Wed Oct 09, 2013 3:48 pm

livesoft wrote:It might be interesting to find out what will happen though. That way, folks won't have to guess the next time.
"Hold my beer and watch this!"

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Re: What will happen to BND if US default?

Post by nisiprius » Wed Oct 09, 2013 4:20 pm

But to answer the original poster's question... this fool will rush in... it certainly seems obvious that if the U.S. Treasury were to default, the value of Treasury obligations would drop. How far it would drop would depend on how long bondholders thought they would have to wait for payment and how much of the promised payment they would get paid.

If it were some glitch, like the lawmakers intending to act at the very last minute but the Treasury's computers going down under the load, i.e. bondholders believed they'd get every penny, but a few days late, that might not be apocalyptic. If the Treasury--just imagining the unimaginable here--said, "Sorry, the cupboard is bare, you are not going to get paid anything anytime ever, zero, zilch, zippo," then the value of Treasury bonds would drop to zero.

Since Total Bond is somewhere around 40% government, and 22% "Agency mortgage backed," and a soupçon of other government-related things, it seems obvious that anything that caused U. S. Treasuries to drop by X% would cause Total Bond to drop AT LEAST 40% of X%.

In other words, no, if there were a serious, real, deep, long-lasting default of the kind that seems unimaginable, Total Bond would not serve as a good portfolio anchor.

The problem is that it's not at all obvious what you would want to hold instead. A serious default in Treasury bonds, as in no pay ever (like the bonds of the Confederate States of America) is so extreme and unprecedented that you can hardly predict what else might happen.

Here's what I mean by "can't predict." I know someone who is a civilian employee of the Department of Defense. He was furloughed as a result of the government shutdown, and asked friends to make some kind of guess as to how long it might last so that he could plan whether to take a vacation, etc. He got a range of answers. The range of answers were, basically, a range of predictions on how long the shutdown would last.

Not one person predicted that he would be called back to work WITHOUT the shutdown having ended, but that is what happened.
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Re: What will happen to BND if US default?

Post by manwithnoname » Wed Oct 09, 2013 4:29 pm

hsv_climber wrote:Considering that yield on US bonds did not rise in Oct. despite all the talks, we should assume that collective market wisdom does not believe that anything bad should happen to BND.

OTOH, I am surprised that stock market has not lost more than it did. Unlike bonds, stocks have real danger, since all US companies, that are doing business with the government in one way or the other, are currently losing money. That should effect ALL government contractors, and ALL service-related businesses. There will be real profit losses for many businesses in the 4th quarter.
The markets are watching but not selling off now because the traders do not want to sell off and then miss out if securities rise because the idiots in DC have struck a deal. If the politicians do not work out a deal to fund the govt by this Friday afternoon the institutional investors will sell off Treasuries and stocks by that day's 4pm close to avoid taking a risk of holding these securities over the weekend without Washington coming up with a deal and then having to sell at even lower prices at 9:30 Monday the 14th. Traders remember the 87 crash when because of international events the prior weekend all of the institutional investors rushed to sell the equities in their portfolios when trading opened on Monday morning (Oct 19th, 1987) but because there were no buyers in either the equities or futures markets the market kept dropping until the Dow lost 22.6% by the 4pm close with loss of $500B in market capitalization. The volume of shares traded on Oct 19 was 2X the previous record and the NYSE was closed for next 4 days while traders processed all the trades which were written on paper. No one wants to be selling at the opening bell on Monday, Oct 14 because Congress failed to come up with a deal to fund the govt over the weekend.

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Re: What will happen to BND if US default?

Post by livesoft » Wed Oct 09, 2013 4:31 pm

I believe there are triggers or circuit breakers in place to stop trading nowadays.

http://www.sec.gov/investor/alerts/circ ... lletin.htm
http://usequities.nyx.com/markets/nyse- ... t-breakers
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Re: What will happen to BND if US default?

Post by masteraleph » Wed Oct 09, 2013 7:49 pm

livesoft wrote:I believe there are triggers or circuit breakers in place to stop trading nowadays.

http://www.sec.gov/investor/alerts/circ ... lletin.htm
http://usequities.nyx.com/markets/nyse- ... t-breakers
There are, but trading for the day isn't halted unless there's at least a 20% drop (the breakers for lower amounts only cut trading for 15 minutes, and not after 3:25). A 20% drop on Monday would still be huge.

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Re: What will happen to BND if US default?

Post by LadyGeek » Wed Oct 09, 2013 8:09 pm

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Government shutdown and/or default discussions may only take place on this thread: Government Shutdown/Default [effect on investments]. Note that our prohibition on political and economic policy discussions applies even here. Discussions must be limited to investing questions related to these events.
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