标题: Hypothetical US Default [打印本页] 作者: JustasS 时间: 2011-7-27 15:46 标题: Hypothetical US Default
Hey all, anxiously awaiting LII results, but thought id post this on LIII board as well.
I have been thinking about this and wanted to get some opinions. Lets say hypothetically the US defaults. Theoretically, the Government bond yields would increase (sharply), cause depreciation in the values of current US bonds. However, couldnt a default also create a market panic and a flight to safety, leading to a sell off of stocks and purchase of bonds? In that case, even though the US defaulted its cost of debt would remain low because of the flight to safety. What do you think? Which is more likely? I would say option 1.
Also, shouldnt the mere fact that the US is in this situation make the govt Bond yields increase?作者: rohitdoshi 时间: 2011-7-27 15:46
I guarantee that if the US defaults, US bonds will decrease in value. People will buy non-US assets, like the Euro.作者: Wendy01 时间: 2011-7-27 15:46
I was thinking more like CHF or Yen. The euro is in trouble too with their debt. I hate saying this and of course i dont want a default, but im just very curious as to what would happen.作者: jbaldyga 时间: 2011-7-27 15:47
Well, people will probably buy those two currencies as well. US default would result in broad depreciation of the dollar compared to many currencies.作者: PalacioHill 时间: 2011-7-27 15:47
Well, hopefully it wont come to that.
GL with your test results.作者: bchadwick 时间: 2011-7-27 15:48
Forget bonds. If the US defaults US bonds will tank and other countries could follow suit due to the knock on effect. What will be a sure bet in times of crises such as this is gold - the eternal save haven - that price will simply sky rocket.作者: neil1234 时间: 2011-7-27 15:48
If the US defaults on its debt, do you really think that the flight to safety (i.e. quality) will be to US debt?作者: segalm 时间: 2011-7-27 15:48
Honestly, im not sure thats why im asking. I still feel like the US will be viewed a "safe", and panic in the markets would to that. Like we said above, maybe int bonds, but Euro situation isnt good as well.
I know the theory etc but im curiious to see what would actually happen.作者: Iginla2011 时间: 2011-7-27 15:49
if the US gov't defaults the world will end and you need not worry about what to own作者: jarobi04 时间: 2011-7-27 15:49
The notion of the US "defaulting" on its debt seems a little absurd in the first place. There are tons of things which are likely to not be paid before treasury holders are not going to be paid.作者: strikethree 时间: 2011-7-27 15:50
gjertsen Wrote:
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> The notion of the US "defaulting" on its debt
> seems a little absurd in the first place. There
> are tons of things which are likely to not be paid
> before treasury holders are not going to be paid.
The notion of the US eventually paying all of it's bills, or at least looking solvent without destroying the value of the $$ is what is absurd to me. To think that debt of the US carries the same rating as JNJ or XOM is a joke. Look at the balance sheet and cash flow of the US vs JNJ, XOM or other currencies. I should have moved to AUS when I had the chance 5 years ago.
In the short term I doubt we will have a "default" if we do the inevitability of the destruction of the $$ will accelerate. Just a slight interruption will tack on a minimum of a .5% risk premium on our bonds for forever.
The real question is what will the CFA test look like without the risk free asset? Or will they say bonds issued by China?作者: kkn006 时间: 2011-7-27 15:50
The US is not defaulting so this is a moot point.作者: cfa10yrplan 时间: 2011-7-27 15:51
If Congress and future Presidents learn that they can talk away debt problems with more promises , what will happen to their resolution to cut debt and increase revenues through taxation? All of it will turn into "wink wink" to fool the markets .
They talk of raising the debt limit now , but there isn't even any mention of resolving to reduce the debt limit when the supposed cuts in spending and increased revenue through savings and taxes happen.
So we'll just roll along from bad to worse to terrible.
In fact the Chinese Gov't is requesting the US to continue to raise the debt limits , which is really funny.
No one wants "austerity" measures for the US !作者: bpdulog 时间: 2011-7-27 15:51
They have raised the debt limit over 100 times, so this is not exactly new ground that we are covering politically. Furthermore, the ceiling is not indexed to anything so it is kind of an artificial number to begin with.
That being said, I think it is a good thing that politicians are using this as a method to move closer to balancing the budget and reducing the deficit. Just sucks that they are going about it in such a haphazard way.作者: eoin 时间: 2011-7-27 15:52
Kabaka, I get it, but a thread based on a hypothetical with such a low probability is pretty silly, as gjertsen also points out.
"Let's imagine armeggeddon breaks out on Aug. 3 and talk about that..."
I'm pretty smart and I still don't see the benefit.
Should be a pretty short thread, as in, it's a low probability event with a huge downside. What does one do in such a situation - they buy insurance - either through cds or options.作者: jbaldyga 时间: 2011-7-27 15:53
Some thoughts top of my head in no particular order: Negative interest on CHF, your hair dresser speculating in gold futures, China asking the US to use Alaska (or any other state or collection of states) as collateral for Treasuries, Bill and Melinda Gates Foundation issuing synthetic risk free instruments, Saudis leasing US military kit paying in oil作者: segalm 时间: 2011-7-27 15:53
egal
your forecast is hilarious. I think you have a plot for a kick ass sci fi novel.
here is the thing: U.S. Treas are planet Earth's definition of a "risk free asset"
s&p, moody's can assign labels, but they can't tell the market anything the market doesn't already know.
the EMH, remember?
Mind you, none of the above are normative judgements, I'm not saying its good or bad, just that it IS a fact in the universe.
U.S. Treas yields reflect not the s&p or moody's labels, but are more a reflection of the cost/benefit equation that's available in the market place. You want the safest possible investment, taking into account market expectations of inflation? That's your U.S Treasury. Full stop.
If the U.S. actually defaults, nothing whatsoever is "safe".
The bigger worry is the long-term U.S. gov balance sheet.
Edited 1 time(s). Last edit at Tuesday, July 26, 2011 at 08:43PM by zoya.作者: 伯爵 时间: 2011-7-31 11:24
Should US default, the bond price would decrease. And the yield rate of US bond is commonly used as the risk-free rate in many financial asset/portfolios. So the default is not only cause a panic in the bond market, but also a chaos in the capital market. The commodity market, like oil and metal, will also go down as a result of the fear that US is falling into recession again. I think people would purchase more risk-averse assets like gold. Or they may wish to hold cash in their hands.
