New York (CNN) No one can yet say when the US Treasury will not be able to pay all US bonds in full and on time if lawmakers refuse to raise the debt limit.
That day – the so-called “date X” – is currently estimated to fall sometime between early June and early August.
Bond market pundits still expect lawmakers to strike a deal before X, if only at 11:59.
“[N]o Anyone in Washington have any incentive to see a default in the US… [but] Libby Cantrell, managing director and head of public policy at Pimco, said, “There is no real incentive for anyone to make concessions before the actual deadline….. However, we remain confident that the deal will happen in a timely manner to avoid any type of breach.” “. .
But even if that is the case, between now and then, bond investors should expect volatility.
“As long as discussions are ongoing between the Biden administration and Congress, we expect volatility to be relatively high,” said Colin Martin, director and fixed income strategist at the Schwab Center for Financial Research.
Bond investors are about pricing in the risk that the debt they’re buying won’t be paid back — whether on time or at all. Usually, US Treasury Bonds are considered to be one of the safest assets in the world because they are backed by the full faith and credit of the United States. But the lack of a deal to raise the lawmakers’ self-imposed debt ceiling near date X introduces unwanted risks into every investor’s calculations.
said Gary Gensler, chairman of the Securities and Exchange Commission, at the event meeting Monday.
Short-term treasury bills maturing on or shortly after June 1 have seen yields rise in the past month, indicating investors want more money in return for taking what they see as a higher risk that they may not be repaid on time.
Martin points out that this is an important distinction from assuming that they are not paid in full. The assumption is that even if the US does pass History X briefly, it will quickly resolve things and make all the payments it has to make. Unlike corporate debt, the risk is that the bond investor will only be able to recover a portion of their investment. “But with Treasuries, it’s more about ‘When will I get the money back?'” he said. “
Currently, yields on 1-month Treasury bills are much higher than yields on 10-year and 30-year Treasury notes. Bills due on or before May 30, Martin noted, yields have fallen and prices have risen because investors are willing to pay for the near guarantee of immediate payment.
So what, if anything, should bond investors do now?
Martin suggested that those who have invested in Treasury bills that mature on or immediately after June 1 and who definitely need their money at that time — for example, to pay their own bills — might consider selling those bills now and reinvesting in bonds that mature sooner.
If you invest in bond funds, make sure the bond portion of your portfolio has adequate exposure to medium- and long-term bonds, rather than being too heavy toward short-term, high-yield bonds. With the latter, he said, “you run the risk of reinvesting in the future when it might be better to fix prices with certainty now.” These rates currently range from 3.5% to 4%.
And as uncertain as there is about being paid on time by the Treasury, there could be a trip to the 10-year Treasuries – which means their prices will go up, which can help protect your portfolio. “They are still the most liquid and safest investment out there,” Martin said.
When it comes to your exposure to non-Treasuries, Martin recommends sticking firmly to high-quality investments, rather than corporate junk or emerging market bonds. The reason: If the economy turns south – or the unthinkable happens and the US defaults – these high-risk debt instruments will come under severe pressure.
“If you need to borrow money, you need the confidence of the markets to lend you,” said Martin. If there is a recession or any concern about the Treasury paying investors on time, there will be less confidence in a move.
For 401(k)s, Martin said the best thing to do right now is to review the bond’s stock allocation and make adjustments if needed. As we head into June, stocks are likely to experience more volatility as they are riskier assets than bonds.
According to spokesperson Jessica Chevalacqua, looking at the long-term picture of your investments is also advice from Vanguard.
“Our general guidance to investors is to maintain a balanced portfolio in line with their objectives and to remain disciplined. The long-term view is especially important during periods of uncertainty,” she said.
– CNN’s Elisabeth Buchwald contributed to this report
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