ba736

bchadwick Wrote:
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> The elephant in the room is where the heck does
> one put cash? Money market sweeps still hold a
> lot of stuff as 90d T-bills. Will T-bills be
> paid? Is the Treasury going to single out
> specific maturities to hold off on?


I would think in the hypothetical scenario that the US defaults the choice investors are faced with boils down to holding:

1) Cash, which is effectively very short duration gov't debt with no interest
2) T bills and notes, which if defaulted on become gov't debt that *hopefully* can be expected to pay interest at some point whenever congress gets things together

As far as I know no markets other than these two are large, liquid, and safe enough to absorb the kind of liquidity we are talking about. Right? This is an assumption not necessarily a truism.

So given that choice, I would rather be holding something that *might* pay me interest eventually even if currently defaulted to something that will definitely not pay me any interest. Both credits should be the same. Dollars are obviously backed by the same entity as USTs.

Hypothetically if the government were to default and all of the sudden implied theoretical 5 year treasury yields went up to 5% or something, many people (me included) would be buying hand over fist on the assumption that even if a coupon payment or two were delayed the possibility of locking in a risk free 5% of return for the next 5 years looks pretty good right now. That would clearly knock rates back down...

I am just thinking out loud here - I run out of mental energy very quickly with the infinite feedback loops in such a bizarre situation.

Where do we disagree?