U.S. Treasury bonds have long been considered the safest of investments. They are part of the bedrock of the banking system, making up much of the capital that banks hold to support their lending. They serve as collateral for complex transactions between corporations, and as a haven for the risk-averse.
If their bankability is suddenly in doubt, investors ask, what’s the alternative?
“I can’t think of a risk-free asset left that would not be impacted by a default,” said Michael C. Schlachter of Wilshire Associates, who advises big pension plans.
Brian Reid, chief economist at the Investment Company Institute, said the mutual fund industry group has heard from members that money market funds have been working to become “more flush with cash” as securities they hold mature.
That could help them handle customer withdrawals in a crunch.
Investors have also become increasingly reluctant to hold Treasury bonds that mature in early August. The Obama administration has said the debt ceiling must be raised by Aug. 2.
Yields on Treasurys that come due in early August are more than twice as high as yields for comparable bills maturing in September, meaning that investors are demanding higher interest rates on federal IOUs that are seen as more likely to be affected by any disruption.
The scarcity of alternatives leads some analysts to predict investors generally will stick with U.S. government bonds even if the government defaults.
But the fact that so many investors are still counting on a political compromise could make the reaction even sharper if they’re wrong.
Institutions and other investors sitting on cash could seize the moment by buying assets at discount prices. Others could face tantalizing frustration, like homeowners longing to trade up in a depressed market but unable to buy a new home until they sell the one they already own.
Staff writer Neil Irwin contributed to this report.