BTW, remember back in 2011 how during all of this hoopla over default, Treasury bonds rallied, even in the face of the ratings outlook downgrade? Of course, there was a bit of a panic in risk assets at the time, unrelated to the debt ceiling debate.

I really appreciate your description of the debt issue, but may I ask you about something else in particular related to it.

It seems that the risk to money market funds, holding only short-term debt, is where a more direct potential threat exists. In facing the 2011 “debt crisis” American Century Capital Preservation Fund stated: “If the White House and Congress inadvertently create an impression that the U.S. may even temporarily miss a debt service payment, the fixed income market is likely to respond with falling prices and higher yields. One area where we’re evaluating and monitoring that threat very carefully is in the money market arena, where a sudden sharp rise in interest rates could theoretically cause money market funds holding a high percentage of U.S. government debt to ‘break the buck.’ That’s the hypothetical bad news.”

cont. – “The good news is that it appears that it would require an extremely large market reaction (something in the neighborhood of an immediate 300 percentage point increase in money market yields, pushing them from near 0% now to over 3% over a very short time frame) to cause these funds to break the buck.” – That was their opinion back in 2011.

Given that potential issue with the money market fund, would you think that holding T-bills in a Treasury Direct account would be the far better way to go? In other words, do you think Treasury Direct is likely the safest way for one living in the US to hold T-bills?

Thanks

“NEW YORK (AP) — The nation’s largest manager of money market mutual funds said Wednesday that it no longer holds any U.S. government debt that comes due around the time the nation could hit its borrowing limit.”

Also, short-term update for today addresses the spread between 1-month and 6-month T-bill yields, noting that Bloomberg reports that the spread has dropped off a cliff because demand has plunged for T-bills with payments due in the next several months. T-bill and T-note spreads are positive when looking at maturities of one year and beyond, suggesting that market participants do not yet fear default but liquidity. That is, investors still think they will be paid but the payments may be delayed.”

It goes on to say that there is a very bad side to “delayed payments.” That money market funds are “very sensitive to delayed short-term T-bill payments because they are supposed to show a daily net asset value of $1.00. If they fail to do so because of a delayed receipt of payment from a matured T-bill it would be nothing short of disastrous
for the fund complex and the world financial markets.” In other words, it would “break the buck” within those funds.

For “safety” I chose a money-market fund that holds only short-term treasuries. I’m now thinking of getting out of it entirely to avoid this potential breaking-the-buck scenario. I would have never thought that short-term securities would face a potential threat while longer-term securities did not.

Of course, an agreement may be reached, but it’s sure getting close to the wire, and this reveals a risk side to Treasury-only money market funds that I had never considered.

This is an extremely interesting approach. The present debt ceiling drama in the United States makes me wonder about something though.

From a news article: “An ‘exasperated’ Barack Obama offered no guarantees the U.S. would avoid an unprecedented default during a crisis meeting with Wall Street bankers yesterday. . . . ‘When you have a situation in which a faction is willing to default on U.S. obligations, then we are in trouble.’”

Granted, this may all be political theater again, but does this at all cause you to doubt the safety of T-bills as a place to keep your cash until better investment opportunities arise?

If I can pose a scenario: If you lived in the USA and were invested in T-bills right now but could transfer that money to a “strong bank” immediately, might you consider doing that for the short-term and then wait to see what happens with this current default threat?

In the short-term, during this seeming crisis, is it actually possible that a bank rated as strong by the various rating agencies could temporarily be a better place for cash than T-bills themselves? I would have never considered this in the past, but this current situation makes me wonder.

I had always assumed that prior to a US default we would first have to see a very, very dramatic rise in interest rates. I’d appreciate your thoughts on this unfortunate situation.