Will the US default on its debt when August 2nd arrives? Is a downgrade by the rating agencies to the US's AAA rating likely? Or, will Congress and the President arrive at a deal to manage the US's $14.29 trillion debt?
We have received these questions from many of you over the past few weeks. Here are our summary thoughts about the situation. Of course, we are just a phone call or email away if you'd like to discuss this further.
Clearly political posturing is going on, and the consensus view from the "experts" has been that a deal will be reached at the last minute.
- Credit markets generally don't appear phased by the prospects of default or downgrade to US debt. Ironically, most Treasury yields have dropped over the past few weeks, and Treasury futures expect longer term rates to remain low.
- In addition to the credit markets, corporate earnings reports have so far been encouraging, indicating that many companies on average are navigating appropriately through the challenging economy.
- A downgrade, if it were to happen, would in our view be worse from a perception issue rather than a financial one, at least initially. The US should have cash to pay creditors, although it may have to delay payments to government employees or entitlement programs until a solution is reached. Over time, however, a solution must be reached, in our view, because it could impede economic growth longer term.
- Guessing the outcome is not productive, and we're not recommending any changes to portfolios based on this situation. In fact, we've designed your portfolios to navigate through these volatile and uncertain times. We keep bond maturities relatively short, to protect against rising rates over time. We've avoided US Treasurys in most cases, particularly those greater than two years.