The odds that the U.S. will default on its debt on or after August 2 increase each day. Some credit analysts believe the odds are in favor of insolvency. In the event of default, credit rating agencies like Moody’s and Standard & Poor’s will most likely downgrade the country’s credit rating from Aaa.
Worst still, if a deal is reached and the debt ceiling is raised only for the short term, the agencies may still downgrade. They may view the legislation as simply an act of “kicking the can down the road.”
U.S. bonds have always been considered a safe haven. Debt problems in Europe have caused international capital market investors to buy U.S. paper. This has kept the interest rates the federal government has to pay very low, despite unprecedented levels of American borrowing. The safe haven status could be ruined by a rating agency action.
24/7 Wall St. examined investments that would be safe in the event of a default. This does not mean they will have high yields or that they are inexpensive. It means that they are assets that are unlikely to lose their value. Additionally, they are holdings individual investors can buy. Of course, asset managers could provide a fairly long list of low-volatility and low-return assets.
The debt ceiling has been reached before and not raised immediately. The trouble did not cause stock markets to collapse at all. In the fall of 1995, it was reached, but not raised until the following spring. Until March of 1996, the issuance of new debt was suspended. During that period, the Treasury took steps to raise funds to meet federal obligations that did not exceed the debt ceiling. In the event the ceiling is not raised by August 2, investors would be happy to see a reprise like the 1995 to 1996 period. If that period is a precedent, no one would have to sell the stocks they own, or buy gold or silver to maintain the value of their portfolios. The predictions are so dire now, however, that fewer and fewer investors are willing to sit and hold their current portfolios.