[Debt ceiling discussion mega-thread]

[ShaftoesSpreadsheet]

[We normally do not allow discussions on economic policy. However, the impact of the debt ceiling on investments is major news and investors are concerned. The site owner, Alex Frakt, has given permission to discuss the investing aspects of the current debt ceiling issues.

Please use this single thread to discuss impacts of the US debt ceiling on your investments.

Note that we will enforce policy on other economic policy topics. Political comments remain off-topic. --admin LadyGeek]

I know this is a political topic and has to do with legislation that is pending, but hopefully we can keep it civil and narrowly focused to just T-Bills.

Right now if congress does nothing and the debt ceiling is hit what happens with T-Bills? And what if the US defaults, which I guess would happen if the treasury ran completely out of options? Last time federal employees were put on furlough... but I don't remember anything about bond obligations being interrupted. Didn't the treasury do some damage control and prioritize essential workers, military, essential debt payments, but paused other things to try and mitigate the issue.

OP is holding a sizable chunk of T-Bills. Maybe a bank CD is safer?

[JayB]

I know this is a political topic and has to do with legislation that is pending, but hopefully we can keep it civil and narrowly focused to just T-Bills.

Right now if congress does nothing and the debt ceiling is hit what happens with T-Bills? And what if the US defaults, which I guess would happen if the treasury ran completely out of options? Last time federal employees were put on furlough... but I don't remember anything about bond obligations being interrupted. Didn't the treasury do some damage control and prioritize essential workers, military, essential debt payments, but paused other things to try and mitigate the issue.

OP is holding a sizable chunk of T-Bills. Maybe a bank CD is safer?

This topic -- anything about the Debt Ceiling -- will locked. But in before the lock... I also hold a lot of T Bills, with the last maturing in mid July and am also wondering what's safer. At worst, I figure that the payouts may be a bit delayed, but am not worried about ultimately not being paid. After maturity, I'll put the funds into FDIC-insured bank deposits until the uncertainty clears.

[Pops1860]

This thread is locked (economic policy). See: Non-actionable or Trolling Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

The US debt ceiling and possibilities of default are in the news, but we will hold to forum policy. Conjecture on economic policy (what "might" happen) remains off-topic.

Moderator Pops1860

[djshackesq]

[Thread merged into here --admin LadyGeek]

Perhaps this is a naive question, but can the US government hitting the debt ceiling impact liquidity of treasury bonds and treasury money market funds?

[CloseEnough]

I don't know, but would think that if you play that issue out, the answer is it is a risk.

Question I would have is, would a safer place to hold cash be in a FDIC insured account rather than a MMF?

[jharkin]

I was about to ask an even more simplistic question - After we pass the limit today does the government completely stop selling bonds? I.e. can we even buy IBonds, EEs, etc at Treasurydirect before the cap is raised again?


Ye, I know its a total first world problem and the bigger long term issues at stake should make me rethink buying anyway.

[betablocker]

I wouldn’t worry too much. The Treasury can take lots of “extraordinary” measures to keep everything running. So they will continue to pay interest and issue new Treasuries. In fact they had a record auction of 20 year Treasuries the other day. The estimate is that those measures would be tapped out by summer. If the default happened it would be up to Treasury to figure out which payments to prioritize. But let me just prognosticate. It won’t happen. The entire system will be aligned against 5-10 house members and there are other measures like the discharge petition that will probably force a vote that should pass easily. Just ignore the headlines. We’ve been here before and this too shall pass.

[CloseEnough]

I wouldn’t worry too much. The Treasury can take lots of “extraordinary” measures to keep everything running. So they will continue to pay interest and issue new Treasuries. In fact they had a record auction of 20 year Treasuries the other day. The estimate is that those measures would be tapped out by summer. If the default happened it would be up to Treasury to figure out which payments to prioritize. But let me just prognosticate. It won’t happen. The entire system will be aligned against 5-10 house members and there are other measures like the discharge petition that will probably force a vote that should pass easily. Just ignore the headlines. We’ve been here before and this too shall pass.

Well low probability risks with high impact are just that, low probability, until they happen. While you may be correct in your assessment, you might not be. So, question from an investor standpoint is, should adjustments be made to address the risk, or does the adjustment have downsides (less return) that out-weigh any potential risk reduction. And, beyond that, what adjustments could be made in cash and cash like holdings that would actually reduce the risk?

[exodusing]

There's no way to reliably predict what would happen if there were an intentional default on US debt. There could easily be market turmoil hitting everything, including FDIC insurance, since that it ultimately backed by the government and including sovereign debt of other countries. For all we know there could be a flight to quality and liquidity, such as t-bills.

Does the US Constitution allow default (14th amend, section 4)? Would the gov't do untried methods (trillion dollar coin, issuing bonds with very high coupons, etc.)? What will the House actually do? Answering these questions is likely inconsistent with forum rules.

If you're really worried, make sure you have the ability to pay bills without regard to markets.

[Nate79]

Here is the same topic that was locked:
viewtopic.php?t=395322

[djshackesq]

I don't know, but would think that if you play that issue out, the answer is it is a risk.

Question I would have is, would a safer place to hold cash be in a FDIC insured account rather than a MMF?

This is essentially where I'm heading, as my funds in a treasury money market fund are for a house down payment in the next 6 months or so. Moving to a high yield savings account, while slightly lower yielding, will help me sleep better for the time being.

[jebmke]

Here is the same topic that was locked:
viewtopic.php?t=395322

multiple times. Mods need a "lock and merge button"

[JoMoney]

I wouldn’t worry too much. The Treasury can take lots of “extraordinary” measures to keep everything running. ..

It would seem in conflict with the constitution if the Treasury can circumvent Congress to borrow/spend or mint coins of value not explicitly approved by congress.
Curiously, the Federal Reserve has abilities to protect the monetary system outside of that though...

[LadyGeek]

I merged djshackesq's thread into the ongoing discussion.

The topic remains locked for the reason stated above (general economic discussion). As noted in the site owner's post in the locked thread Re: U.S. stocks in free fall:

A reminder from the forum policies:

Investing - Theory, News & General

If it's investment related and it doesn't fall into the above category it goes here.

General economic discussions do not fall under the category of "investment related". Nor do they fall under the allowed topics in any of our other forums. You will have to find another site or outlet if you wish to take part in such discussions.

Just in case the previous was unclear, we specifically addressed this issue in the following policy:

Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

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• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

(Thanks to the member who reported the post and provided a link to this thread.)

[blackwhisker]

I apologize if similar question has already been posted on this forum.

All the major newspaper report that U.S. would likely hit its debt ceiling this Thursday.

If that happens and if situation doesn't improve, does it mean eventually individual investors would not be able to get their money back when their treasury bills/notes mature?

If that happens, are CDs even worse than treasury bills? what happens to the 250K per account FDIC insurance if the US government defaults on it's debt?

[Tom_T]

Speculation on what-if is not allowed here.

[mkc]

blackwhisker's topic merged here. Topic remains locked

[TrustTheMarket]

[Thread merged into here --admin LadyGeek]

Hi there. As you can see from my username, I trust the market and hold a passive Vanguard Target Retirement Fund. I normally ignore the news, however this default keeps coming up and I haven’t heard it clearly explained, especially as it pertains to our investments and any reason for concern. Thank you.

[Tom_T]

We cannot speculate on what will happen, but here is a basic explanation of the issue.

https://www.usatoday.com/story/news/pol ... 066657002/

[secondopinion]

Hi there. As you can see from my username, I trust the market and hold a passive Vanguard Target Retirement Fund. I normally ignore the news, however this default keeps coming up and I haven’t heard it clearly explained, especially as it pertains to our investments and any reason for concern. Thank you.

It does keep coming up and gets locked because it is not actionable nor follows rules on politics.

I have seen this wave of "concern" before last year, I think. It is nothing more than a political tool to talk about this; why in the world would they willing default when they can pay for it at the stroke of a pen? Seriously, they would not.

[chinchin]

The US has a statutory limit on the amount of debt it can carry.
The US has national debt and also uses deficit spending.
The US needs to borrow money to perform deficit spending and to pay interest on the already existing debt.
If the Treasury cannot pay interest on the debt, that could be considered a default.
When the debt ceiling is reached the Treasury can perform temporary extraordinary measures such as taking money from government employees' retirement funds to maintain spending.

[Lawrence of Suburbia]

It's nothing to worry about. Excuse for political posturing by the [political party deleted]s.

[wolf359]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just trying to understand the worst case scenarios.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

[justsomeguy2018]

[Thread merged into here --admin LadyGeek]

This is not a political post.

The headlines are are saying the U.S. may default on its debt next week, or something like that.

I am sitting on about $85k of U.S. treasuries of various short-term maturity dates, not to mention bond fund holdings and i-bonds.

Is all of this money now at risk of being lost??

Do I need to sell my treasury holdings and treasury funds to be safe??

[chinchin]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just the impact.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

1) The system collapses because all of a sudden no one could use sovereign debt as collateral. Lehman Brothers 2.0.
2) This actually happened during the Obama years.

[secondopinion]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just trying to understand the worst case scenarios.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

Right. These implication are well known and hence why it is a strong political tool; it is a game of chicken in which we have really no choice in the matter. It will do no good to take action in response to this game.

[mjg]

No, it is not.

[chinchin]

Sell it and get what? Federal Reserve Notes? That are backed by...Treasury securities?

[Tom_T]

Here's a summary. Your bonds are safe.

https://www.cnn.com/2023/01/18/politics ... index.html

[samsoes]

The economic systems of the entire planet would be in dire peril if the US defaulted on its debt. At that point, you'd be better off with old-fashioned currency, like guns and whiskey. Don't worry about it. If it happens, we'll have much greater things to worry about than T Bills and I Bonds.

[secondopinion]

Another post on this? I am almost tempted to buy more with all this fear abounding.

[Booogle]

I have seen this wave of "concern" before last year, I think. It is nothing more than a political tool to talk about this; why in the world would they willing default when they can pay for it at the stroke of a pen? Seriously, they would not.

Bank of America says U.S. is likely to default:

https://www.thestreet.com/markets/u-s-d ... of-america

[wolf359]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just the impact.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

1) The system collapses because all of a sudden no one could use sovereign debt as collateral. Lehman Brothers 2.0.
2) This actually happened during the Obama years.

Your response to #1 makes no sense. People will continue to use sovereign debt as collateral. If investors no longer consider it risk-free, then they will simply charge accordingly.

Countries have defaulted before. Even the US has technically defaulted before.

If the cost of borrowing rises significantly for the US because it is no longer considered risk free, that means Treasury interest rates would rise. That would make bonds drop in value again. Probably stocks as well (both international and US.) It won't be pretty, but it shouldn't be a total systemic collapse.

[Tooth]

An actionable thing to do is have plenty of liquid emergency money to keep your own lights on.

[chinchin]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just the impact.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

1) The system collapses because all of a sudden no one could use sovereign debt as collateral. Lehman Brothers 2.0.
2) This actually happened during the Obama years.

Your response to #1 makes no sense. People will continue to use sovereign debt as collateral. If investors no longer consider it risk-free, then they will simply charge accordingly.

Countries have defaulted before. Even the US has technically defaulted before.

If the cost of borrowing rises significantly for the US because it is no longer considered risk free, that means Treasury interest rates would rise. That would make bonds drop in value again. Probably stocks as well (both international and US.) It won't be pretty, but it shouldn't be a total systemic collapse.

2007–2008 financial crisis (Wikipedia)

[Booogle]

Bank of America says U.S. likely to default

https://www.thestreet.com/markets/u-s-d ... of-america

[arcticpineapplecorp.]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just the impact.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

1) The system collapses because all of a sudden no one could use sovereign debt as collateral. Lehman Brothers 2.0.
2) This actually happened during the Obama years.

Your response to #1 makes no sense. People will continue to use sovereign debt as collateral. If investors no longer consider it risk-free, then they will simply charge accordingly.

Countries have defaulted before. Even the US has technically defaulted before.

If the cost of borrowing rises significantly for the US because it is no longer considered risk free, that means Treasury interest rates would rise. That would make bonds drop in value again. Probably stocks as well (both international and US.) It won't be pretty, but it shouldn't be a total systemic collapse.

2007–2008 financial crisis (Wikipedia)

i think this is the citation you're looking for:

2011 US debt ceiling crisis

also to answer the OP's question we did default once before in 1979 briefly but it cost us:

This default was temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.

source: https://www.forbes.com/sites/beltway/20 ... 11339a6021

[wetgear]

Bank of America says U.S. likely to default

https://www.thestreet.com/markets/u-s-d ... of-america

That's rich coming from BofA.

[chinchin]

Are there any steps that can actually be taken in the event of a hypothetical default? (Not discussing the politics. Just the impact.)

Specifically, what happens to a 3-fund portfolio if:

1) There is an actual default.
2) There is no actual default, but the US debt rating is downgraded due to the threat of default.

Are there any steps that can actually be taken if/before either of these two events occur?

I don't see any shelter in this storm. If there aren't any actions that can be actually taken, then the best bet is to batten down the hatches and ride it through. Is that actually the best course of action?

1) The system collapses because all of a sudden no one could use sovereign debt as collateral. Lehman Brothers 2.0.
2) This actually happened during the Obama years.

Your response to #1 makes no sense. People will continue to use sovereign debt as collateral. If investors no longer consider it risk-free, then they will simply charge accordingly.

Countries have defaulted before. Even the US has technically defaulted before.

If the cost of borrowing rises significantly for the US because it is no longer considered risk free, that means Treasury interest rates would rise. That would make bonds drop in value again. Probably stocks as well (both international and US.) It won't be pretty, but it shouldn't be a total systemic collapse.

2007–2008 financial crisis (Wikipedia)

i think this is the citation you're looking for:

2011 US debt ceiling crisis

No. That falls under scenario #2. The very article you linked states this about scenario #1 (actual default):

If the United States breached its debt ceiling and were unable to resort to other "extraordinary measures", the Treasury would have to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations would likely have led to a significant international financial crisis.

[km91]

Congress passes spending bills. Congress requires the government to finance itself by issuing debt. For purely political reasons the level of congressionally authorized spending and the level of debt the government is allowed to issue are voted on separately. This allows for performative political theater and the threat of the possibility of default if concessions aren't made. Usually the demanded concessions have to do with the level of government spending, which was previously voted on and authorized by these politicians. This doesn't even get into the fact that the national debt itself is an accounting gimmick used only for political purposes. Why does the Treasury need to print a 30yr bond to pay for a box of new pens for the Department of Transportation instead of just printing new dollars?

[Kevin K]

[Thread merged into here --admin LadyGeek]

An article in today’s New York Times recommends keeping a goodly stash of cash sufficient to ride out any turbulence in the bond and stock markets due to a possible default in an FDIC insured online savings account rather than T Bills or the like.

I’m wondering if iBonds would work just as well, since they’re really the only major cash holding I have apart from short and intermediate Treasuries.

To be clear I’m not in any way trying to start another thread speculating about the debt ceiling. Just trying to understand what cash options make sense.

[JayB]

An actionable thing to do is have plenty of liquid emergency money to keep your own lights on.

^ This. Some folks insist that the whole topic is not actionable, but you wisely argue otherwise. My actionable response has been to sell off any T-Bills and escrowed-to-maturity muni's maturing after May through the end of the year. There are lots of other places to park funds, and I'm spreading the funds around several of these to try to maintain liquidity. I'd rather play it safe than insist that this time is no different than past threats of default.

[Booogle]

There are lots of other places to park funds

Like what?

What is not tied to U.S. Treasuries?

[DetroitRick]

It's not something I'm worried about. These headlines have come up often in the past few years, but this is way below my threshold for concern. Actually near the bottom of my list. Worst case - and I still don't expect it - a very temporary issue (but I do expect the predictions of potential default to continue for years).

My portfolio is always diversified - the best I can do. And money where my mouth is - I made one of my largest-ever T Bill purchases yesterday. I notice that Schwab stills deems them to be marginable, as always .

[secondopinion]

I have seen this wave of "concern" before last year, I think. It is nothing more than a political tool to talk about this; why in the world would they willing default when they can pay for it at the stroke of a pen? Seriously, they would not.

Bank of America says U.S. is likely to default:

https://www.thestreet.com/markets/u-s-d ... of-america

Will Bank of America take a bet with me? This is ridiculous. I see nothing of their claim either besides a headline.

[chinchin]

An article in today’s New York Times recommends keeping a goodly stash of cash sufficient to ride out any turbulence in the bond and stock markets due to a possible default in an FDIC insured online savings account rather than T Bills or the like.

I’m wondering if iBonds would work just as well, since they’re really the only major cash holding I have apart from short and intermediate Treasuries.

To be clear I’m not in any way trying to start another thread speculating about the debt ceiling. Just trying to understand what cash options make sense.

I-Bonds are backed by the Treasury.

[secondopinion]

I have seen this wave of "concern" before last year, I think. It is nothing more than a political tool to talk about this; why in the world would they willing default when they can pay for it at the stroke of a pen? Seriously, they would not.

Bank of America says U.S. is likely to default:

https://www.thestreet.com/markets/u-s-d ... of-america

Will Bank of America take a bet with me? This is ridiculous.

Only ONE House Republican voted to raise the debt ceiling in 2021.

So its a very reasonable call.

No, it is not reasonable. The article itself said there are measures around it. This is merely clickbait -- again.

[secondopinion]

Bank of America says U.S. likely to default

https://www.thestreet.com/markets/u-s-d ... of-america

That's rich coming from BofA.

Where, besides the headline, says that Bank of America said that; Dan Weil, the author, is a freelance writer? Clickbait; the poster of the article has done this for other threads.

[cbox]

I'm all for a stash of cash (enough to carry for years), but I've been in the minority in recent years, when the people who thought stocks could go up forever were deriding cash as "trash." Well, my safety net has paid off handsomely last year and this by giving me an "okay, so what else can you show me" attitude toward market turbulence. There's value in that. And I tell you: while my cash may have lost some purchasing power to inflation, stocks and bonds have lost a whole lot more!

[secondopinion]

An article in today’s New York Times recommends keeping a goodly stash of cash sufficient to ride out any turbulence in the bond and stock markets due to a possible default in an FDIC insured online savings account rather than T Bills or the like.

I’m wondering if iBonds would work just as well, since they’re really the only major cash holding I have apart from short and intermediate Treasuries.

To be clear I’m not in any way trying to start another thread speculating about the debt ceiling. Just trying to understand what cash options make sense.

Again??? How many threads am I going to see on this matter of a default?

The dollar itself would struggle as well if there were a default. So, this is pointless.