The Implication of The Unthinkable U.S. Default: How Will It Affect Safe Haven Treasury Status
07/26/2011 0 comments
The suqabble among our elected leaders on the government's debt ceiling plan as well as the ongoing debt load has started to make people wonder the once unthinkable event: the default of U.S. debt obligation. The probability for the U.S. to lose its AAA rating is growing higher and higher.
Sometimes, a sequence of events lead to a pointing point that can fundamentally change assumptions built in a working model, being a scientific or economic model. The U.S. losing AAA rating is an event that entails investors to re-examine some once unthinkable assumptions. These include the safe haven status of treasury bills and bonds.
Several excellent portfolios have this assumption built in. These include
Both of these plans use long term treasury bonds (IEF or TLT) as flight to safety insurance for a period of market stress such as when stock market (SPY) (SPX). However, if treasury bonds are indeed no longer the last resort of investments, one would need to at least question its role in a portfolio.
Fortunately, up to now, there isn't anything that can replace U.S. credit worthiness, at least not in a large scale. Though it is no longer the risk free, the treasury bonds are still the safest (again on a large scale excluding small sovereign debts). So in a global economic and/or market stress, it is hard to imagine what other country's debts can replace the treasuries for now.
On the other hand, we certainly need to monitor the development closely on any more substantial changes in the future.
Symbols: TLT, IEF, SPY, SPX, Portfolio Strategy
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