Hypothetical US Default defaults, increase, purchase, current, leading

prashantsahni

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?

joehogue

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.

tobeornottobe

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.

tango_gs

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 !

spreads

The US is not defaulting so this is a moot point.

wilslm

gjertsen Wrote:
-------------------------------------------------------
> 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?

jcole21

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.

SkipE99

I think the flight to quality will be to other AAA rated country debt (Swiss and perhaps German come to mind first).

Of course, if the economic contagion became an economic plague with US defaults, it wouldn't really matter where you went. Under a mattress probably as good as any place.

dandman

if the US gov't defaults the world will end and you need not worry about what to own

RMontgomery

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.