October 7, 2013


What If Default Isn't a Disaster? : Since the crisis is purely self-inflicted, the ability of the U.S. to grow fast enough to meet its obligations would not have been altered (ZACHARY KARABELL, OCT 4 2013, Atlantic Monthly)

To begin with, there is currently just a tad under $12 trillion of debt held by the public, out of nearly $17 trillion of total U.S. debt. That is a considerable portion of the global bond market, comprising between 10 and 20 percent of all bonds issued globally depending on how one calculates. And some significant portion of that global market is priced relative to the price of U.S. Treasuries, which remain one of the few highly-liquid, highly-rated, and easily bought and sold instruments of credit in the world.

The size of the market for U.S. bonds is one reason for the high level of concern about what would happen if these supposedly safe and secure instruments were suddenly shown to be not so safe and not so secure. But that size also means that U.S. bonds are not like any other financial instrument. Faced with a default of a normal bond, investors shy away. They demand to be paid more for higher levels of risk. They sell what they have. Faced with a default of U.S. bonds, however, people are running towards them.

Bond yields have actually fallen in the past weeks, suggesting higher demand. Searching for safety in risky times, investors -- and that means not just traders on Wall Street but large asset managers, investment advisors, pension funds and foreign governments -- turn to the one thing that has been safe, U.S. bonds, even as the one thing that looks to be increasingly less safe is...U.S. bonds.

Now you could say that this is a sign of additional risk, because it flies in the face of common sense. Why buy the very thing that looks most imperiled by the political crisis in Washington? Because U.S. bonds are not like any other financial product.

Posted by at October 7, 2013 5:50 PM

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