Treasuries And Government Default

Capper | Jan 19, 2023 | 50 posts since 2018

While probably unlikely, if Congress doesn't get a debt ceiling resolution and we were to actually come to this X-Date as it is called, what are the scenarios for the holders of T-Bills and Treasury Notes? If I had some maturing after the default, is it possible they don't get repaid? If the debt ceiling is eventually resolved after the default, would we then get repaid? Would we get additional interest or just the principal?

I also saw a column in the NY Times were the columnist was suggesting moving your cash into FDIC insured saving accounts if the situation doesn't appear to be coming to a resolution. But if the government defaults and can't pay off maturing bonds how is FDIC insurance coverage going to be any good?

I would be interested in what the community's thoughts are on this.

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Answers

JeffinEasternFL | Jan 20, 2023 | 744 posts since 2020

With foreign countries owning mounds of US debt, not to mention US citizens IOUS held, all debt (interest payments that is - the debts: Never.) WILL get paid, now maybe this time not "on time" should this debacle go to the limits (and beyond them) but, that is doubtful too. "Full faith / credit" and "In God we trust" will have to never be uttered nor printed on currency again should it come to fruition! The chance: "maybe", but I'd bet "slim and none" are the defining odds...

GregoryInBelize | Jan 20, 2023 | 193 posts since 2022

The US government has never defaulted on its debt so you probably should not be worried. This is just Republicans in congress trying to convince american people that they are in control of congress. Some of their points are valid, but threatening to not raise the debt ceiling will only hurt the country and get nothing accomplished. I am guessing they will pull the same crap they did last time. I am so glad I do not live in the US anymore.

GH1 | Jan 24, 2023 | 1,054 posts since 2017

Exactly. The govt will scream dems and republicans are to blame them last min raise the ceiling to make sure no defaults. I have seen this news repeat and repeat for decades. Same story different reporters

PHart | Jan 20, 2023 | 17 posts since 2022

Default = default. So, yes, it is possible that as a holder of a tbill or treasury note you don’t get paid at all, ever. This seems unlikely to me, but it is certainly possible.

It is also possible that you get paid at some point late. This seems more likely to me. You likely would not be compensated for any damages to you if you were planning to use the money to pay off your own debt, but couldn’t do so because the government paid you late. You may receive interest on overdue principal or interest on overdue interest, depending on whether it was an interest payment or maturity payment that was missed. However, there is no statute or other guidance that I’m aware of that would tell you with certainty what you’re entitled to or at what rate that extra interest would accrue. That extra interest, if it was paid to you, could be at an unfavorable rate to you relative to market rates.

FDIC insurance is initially funded by the banks themselves, not the government. So, I think the argument is that if the government defaulted on its debt you would immediately be harmed as a tbill or treasury note. However, all other things being equal, you would not be immediately harmed with respect to your bank deposit/CD because either the bank had not yet failed or because, if it did fail, there would be FDIC insurance money available to make you whole for a period of time. When the FDIC money runs out, then you’re in the same basic position as a tbill or treasury holder.

MAKNYC | Jan 20, 2023 | 323 posts since 2015

A real default like you mention is improbable in the world of fiat currency. The US Treasury can print dollars with reckless abandon to pay off any debt, even if politicians can’t resolve their debt problem. Printing actual dollars is not additional debt. But if they did that, or there was simply a delay in payments of interest and principal while congress plays this game, the ratings agencies would classify it as a ‘constructive default’, which while bad would not likely be catastrophic. But my guess is that if it even ever came to that you would see the U.S. Federal Reserve get creative again, like they do with every crisis. I envision them putting out standing orders for the purchase of all treasury debt as it matures without limitation. Therefore any matured debt would be sold to them with full accrued interest paid to the holder and they would warehouse the debt until congress relented. As for the FDIC aspect, the only minor advantage is they have a relatively small (relative to insured deposits) trust fund set aside for covering bank failure deposit insurance. But in the event of a real default (impossible in my mind), every bank would soon fail and that fund would be exhausted almost instantly and the government backstop would prove valueless, so no real advantage that I see.

daylilly | Jan 24, 2023 | 19 posts since 2022

What do you think of this: https://www.cnbc.com/2023/01/21/how-the-debt-ceiling-affects-your-money-according-to-financial-pros.html

lou | Jan 24, 2023 | 1,004 posts since 2010

Hey, why don't we freak out about something that's never going to happen. Now let's discuss something that is a real threat for younger generations: The govt paying off treasury debt with devalued dollars because it printed too much of them.

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