Debt ceiling strategy

[steelyman]

I’m not changing anything either. It would be hard to repeat my poor portfolio performance in 2022 so no tinkering, just stay in the saddle.

 

[gromit]

This just posted to my Twitter feed, from NBC News - "BREAKING: Treasury Sec. Janet Yellen warns that the U.S may reach its debt limit by June 1 — exactly one month from today."

 

[Lsbcal]

History is on the side of "do nothing".

I don't know what the short term effect on equities would look like. My TIPS would probably not be affected (in my long term view) since they are positioned to hold to maturity. My Federal MM fund would probably not be affected. Whatever happens would probably be over in a few weeks as far as checks and cash go ... my wild guesses.

 

[Sunset]

I can't really think what I would do different.
I would guess actual defaults by the gov't to pay debts will besides jumping interest rates for borrowing, cause a sudden drastic devaluation in the US dollar.

So all my US investments are at risk.
I have a small amount in another country, so we could eat for a few years.....

So can't really do much, but wait a few months.

 

[Dreamer]

IMO, the debt ceiling statute should be abolished. It serves no useful purpose and only serves as a political weapon. This issue is NONPARTISAN. Just some more old legislation that once enacted never ever goes away.

We have enough issues without adding more that is totally meaningless.

+1000

If they did default, when the debt limit was passed again, wouldn't they go back and pay the interest that they missed on treasuries?

 

[DAYDREAMER]

Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

 

[Zathras]

Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

Essentially, yes.
Right now, the USD is viewed as incredibly safe. Our debt is held by many citizens, foreign citizens and countries.
If the US defaulted on its debt, those bonds would require a larger interest rate. This would essentially mean the gov. Has less money for other things.

Investments in the US may slow down (depending upon how long we keep defaulting).

The debt is something to be concerned about. But the time for our representatives to debate it, is when the budget is made and the money spent. Not when the bills come due.

I agree with the others that the debt ceiling should be abolished.

 

[Tadpole]

Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

No, I am so dumb your question seems smart in comparison. I thought that only an amendment rescinding an existing amendment to the US Constitution could override the Constitution. But we have this debt ceiling thing that says we can just not pay our bills. But the Constitution, Fourteenth Amendment, says that if we have already incurred the debt, that existing debt is not in question.

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

So, insofar as existing debt is concerned, how can it just not be paid even without new spending? Debt service seems to me to be pre-obligated by the Constitution. Additionally, what keeps tax and other revenue from being collected and new securities from being sold? Neither is new spending.
See how confused/dumb I am. Your question is way above all mine.

 

[RxMan]

The debt ceiling means nothing when you perpetually overspend.

 

[jldavid47]

Me too... There's nothing I can do anyway except diversify.

No, you can use index options to hedge.

 

[Katsmeow]

So the date has been announced as early June, possibly June 1. Could change and be later with greater tax receipts than anticipated. My Treasury Bills mature in late May. Will probably wait and see to reinvest the.

Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

If the US defaults on its obligations such as not paying on bonds and treasury bills and other bills it will hurt the US global credit rating. The US will have to give higher rates for people to take out their loans. If my treasury bill, for example, was going to mature after the debt ceiling caused a default I would be pretty sore not to get back the money that I loaned to the government. Might make me not want to loan any more.

 

[Free bird]

I listened to an interview with one Congressman. In summary here is what he said. We are willing to negotiate, but we are not giving anything up. LOL

Okay let’s negotiate….you go first

 

[Lsbcal]

As the OP indicated this is about our investment response to the current concern about government default.

THIS IS NOT ABOUT WHAT SHOULD BE DONE BY POLITICIANS IN THE FUTURE.

 

[Montecfo]

So the date has been announced as early June, possibly June 1. Could change and be later with greater tax receipts than anticipated. My Treasury Bills mature in late May. Will probably wait and see to reinvest the.









If the US defaults on its obligations such as not paying on bonds and treasury bills and other bills it will hurt the US global credit rating. The US will have to give higher rates for people to take out their loans. If my treasury bill, for example, was going to mature after the debt ceiling caused a default I would be pretty sore not to get back the money that I loaned to the government. Might make me not want to loan any more.

I'm not sure about all that. Even if we default, which would be ill advised, we would quickly raise the debt ceiling and pay obligations.

Not sure there would be an investible event with respect to bonds.

People would recognize it for what it is. And if you notice, even after the debt downgrade Treasury bonds are still bought in ever higher numbers and at low rates. Did the debt downgrade "cost" us?

The 1.5T deficits as far as the eye can may be a more serious threat.

Still a bad plan but in this age, there are few brakes on government spending.

I have some cash on the sidelines from recent profit taking. My strategy would be to redeploy it on any significant selloff. If the debt ceiling struggle provides that, I will take advantage.

But hopefully sanity prevails.

 

[jazz4cash]

I’ll stick to the strategy question to avoid the “how we got here potholes”. I feel that even if it is different this time markets will recover in 3-5 yrs which is before my FI ladder matures. I am leaning towards buying equities but generally maintaining 70/30

 

[Another Reader]

I have two small pensions and Social Security that might be at risk in a serious default situation. Some of my tenants might have difficulty paying their rents. No job for me to lose.

I have to pay food, utilities, and gas, plus the mortgage here. The rentals are paid off. Cars are owned free and clear. I have enough cash in solid banks to cover a couple of years of all expenses.

As long as the social order does not disintegrate, I would expect to ride out the crisis, should the folks in charge let it get to that. Ten years ago I would have scoffed at that idea. Now... I'm not so sure.

 

[copyright1997reloaded]

If the debt ceiling is reached, it doesn't mean that none of the debts are paid. It means that Treasury must prioritize what it pays and what it defers in order to keep its new borrowings equal or less than new revenue.

Given the above, there is no need for the US to default on maturing T-Bills or fail to pay interest on debt instruments (notes, bonds). It would simply mean that it would need to defer some other payments to do so, e.g. defer programs, etc. Not saying this is good, and I have no idea of what Treasuries plans would be (other than they should have one).

Having said this, let's assume for the moment that on 6/1 the US fails to pay maturing T-Bills (I had some coming due but sold them a bit back when short term rates dropped a lot). If that were to occur, there would be serious ramifications to money market funds that have treasuries, as those holdings would theoretically be in default and would have to be marked appropriately, thus possibly "breaking the buck" on money markets.

People holding bank deposits, CD's, etc. have no such worry (at least for a period of time).

OTOH, as we get closer and the issue isn't resolved, those instruments with closer maturity dates (but after the expected limit date), might sell off and offer additional return (risk premium) and thus offer a better return (assuming a deal is reached).

FWIW, I'm doing nothing (so far).

 

[Free bird]

If the debt ceiling is reached, it doesn't mean that none of the debts are paid. It means that Treasury must prioritize what it pays and what it defers in order to keep its new borrowings equal or less than new revenue.

Given the above, there is no need for the US to default on maturing T-Bills or fail to pay interest on debt instruments (notes, bonds). It would simply mean that it would need to defer some other payments to do so, e.g. defer programs, etc. Not saying this is good, and I have no idea of what Treasuries plans would be (other than they should have one).

Having said this, let's assume for the moment that on 6/1 the US fails to pay maturing T-Bills (I had some coming due but sold them a bit back when short term rates dropped a lot). If that were to occur, there would be serious ramifications to money market funds that have treasuries, as those holdings would theoretically be in default and would have to be marked appropriately, thus possibly "breaking the buck" on money markets.

People holding bank deposits, CD's, etc. have no such worry (at least for a period of time).

OTOH, as we get closer and the issue isn't resolved, those instruments with closer maturity dates (but after the expected limit date), might sell off and offer additional return (risk premium) and thus offer a better return (assuming a deal is reached).

FWIW, I'm doing nothing (so far).

So theoretically CDs at big US money center banks & big Canadian banks are potentially safer than US treasuries? If that were true shouldn’t treasury yield be spiking above CDs with of the same duration? Isn’t the market supposed to price the risk of default & wouldn’t that be reflected by yields by now? Or is this thing so screwy there’s no such thing as a strategy? Isn’t this America looking at itself in the mirror & not liking what it sees? How do you strategize against yourself? I really don’t understand understand how anyone wins this game. It’s us against them. Except there is no them.

 

[Montecfo]

Copyright1997reloaded,

Your analysis is logical and I think most of us believe this is true.

But last time I believe I heard something from Treasury to the effect that there is no legal authority for prioritizing some obligations over others. Or that systems do not exist for doing so.

So not sure if that would work in practice.

I hope we do not find out. Sounds like the administration is engaging now. A good thing.

 

[USGrant1962]

...

But last time I believe I heard something from Treasury to the effect that there is no legal authority for prioritizing some obligations over others. Or that systems do not exist for doing so.

...

I've always heard they would prioritize payments. Per Brookings:

Treasury did have a contingency plan in place in 2011 when the country faced a similar situation, and it seems likely that Treasury would follow the contours of that plan if the debt limit were to bind this year. Under the 2011 plan, there would be no default on Treasury securities. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.

Federal employees would likely continue working during a debt-limit impasse in contrast to the government shutdowns that occur when Congress hasn’t enacted appropriations bills. That’s because federal agencies would still have legal authority, provided by Congress, to obligate funds. Thus, national parks and other government agencies would likely remain open, but federal workers’ paychecks would be delayed.

https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/

 

[DAYDREAMER]

Lol, and I thought I was being smart having loads of cash in MMF earning good rates, and flexible to pounce on good deals. Watch the buck be broken! I'd be so pissed.

 

[Montecfo]

^^^ That always made sense to me,. But apparently there is no legal authority for paying some debts and not others. At least that is true according to the nonpartisan Center for Budget and Policy Priorities.

(The Brookings piece actually makes the same point and suggests Treasury would likely face litigation if such a plan were implemented absent enabling legislation).

Apparently a number of prioritization bills have been introduced in Congress to address this but none passed.

And apparently overhauling systems to pay some bills but not others would be a massive technical undertaking according to several sources.

They also argue that prioritization is still default.

It is all in the attached but Janet Yellen said the same thing in January and in March of this year according to Reuters, Bloomberg and other sources.

https://www.cbpp.org/research/feder...is-default-even-under-a-prioritization-scheme

 

[Free bird]

Lol, and I thought I was being smart having loads of cash in MMF earning good rates, and flexible to pounce on good deals. Watch the buck be broken! I'd be so pissed.

Berkshire Hathaway owns $95 billion in treasuries as of four months ago. Maybe they sold them all & put the cash in a mattress since then.

 

[donheff]

People are scrambling around trying to figure out what to prioritize. It has to be a nightmare. But the sh** has to hit the fan somewhere and wherever it is will have a big impact since our deficits are large. The confusion could cost long lasting turmoil - or maybe not.

I'm not sure I see why a resolution would quickly get made. Maybe a decision that the constitution prevails and some exotic (questionably constitutional) money creation gimick will get pulled out of Yellen's bag. But that will just add to the confusion. I agree with others that the ceiling is an insane Sword of Damocles. Congress and the White House approved the obligations, they should honor them and fight over the future through regular order.

 

[eytonxav]

A default will damage the USA's credit rating and wouldn't that negatively affect what we pay on the interest of our debt? Given the astronomical magnitude of current debt, I can't imagine either side would let this happen. However, spending beyond our means cannot go on indefinitely and major reduction in spending is inevitable.