In life there are many things that do not make sense. Why does it sometimes rain when there is nothing but blue sky and sun? Why would the U.S. government ban online poker when they are seriously in need of revenue? Why do dogs hate cats? Why would Treasuries go up in price if/when the U.S defaults on its existing debt? (Read this again in case you were busy drinking coffee/reading other articles/playing a game/playing two games while drinking coffee.)
I read an interesting article today (@CNBC) that proposed that exact, seemingly ludicrous, (not the rapper) idea. Before you close the blog page and write me off as a loony let me explain what amounted to two valid arguments made in the article.
First, There is an insatiable desire for U.S. treasuries. China, Japan, Europe, Money Market funds, and large corporations all hold U.S. treasuries for security and yield (however minimal it is) because they are considered the same as cash except with a yield. Imagine for a second that I told you that money you put under your mattress earned X% interest annually. Now stop imagining and by treasuries because that is how the global market place views them. When the U.S. hits the debt ceiling (I keep saying when so you obviously know how I feel about the likely hood of compromise occuring between politicians.) it will no longer be able to issue new treasuries. In Economics 101 we all learned that when supply goes down and demand stays the same price goes UP.
Second, Whenever people get spooked by anything they always run from risky assets and fly to safety. The flight to safety is generally U.S. Treasuries. I'm sure all you amateur Sherlock Holmes' and Cam Jansens' (#childhoodmysteryprotaganist) can see where I am going with this. Where do you run if what you are running from is what you normally run to? The answer is simple (is it?) you run to your broker and buy some Treasuries. I have to admit I find this argument to be a little more suspect than the first, but it does bring up a valid concern. If the whole world is collapsing around you then where do you go for yield? I suppose you can argue that if the whole world is collapsing around you that yield is not as important as a supply of food and weapons, but for the sake of discussion lets say that just the European and U.S. bonds are in default. You aren't going to shove your money in stocks because they are termed "risk assets" and you aren't going to put your money in the bank because you need to earn some return. I'm sure everyone remembers the classic cure for a hangover in college? A beer when you wake up. I guess when people say that Investment Firms are like fraternities they really aren't far from the mark.
I will not say that I completely agree or disagree with this article but I will say that it is intriguing. How would you allocate your investments in the event of a U.S. debt default?