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Current Views

October 7, 2013: U.S. Default and Investing in U.S. Treasuries

Thoughts from our Domestic Equity and Fixed Income Teams

In August 2011, the U.S. sovereign debt rating was downgraded to AA by Standard and Poor’s and the debt ceiling was raised on the very day that the U.S. Treasury predicted it would begin to miss certain payments—that is, at the last possible moment to avert a technical default. Somewhat paradoxically, investors responded to the threat of default by fleeing to the perceived safety of U.S. Treasury securities. We expect a similar reaction should the debt ceiling debate once again drive the U.S. to the brink of default in October.

Why would investors see U.S. treasuries as “safe” upon a U.S. default? We think there are two key reasons why this reaction may occur: (1) There is more to the U.S. than just the partisan politics of Washington D.C. The world believes that the U.S. has the resources to make timely payment of principal and interest on its Federal debt. So while payments could be delayed due to political squabbles—and even this may be unlikely given the high priority placed on debt service relative to other required disbursements—bond holders likely have little doubt that they will receive the expected return on their investment in U.S debt; and (2) even in default U.S. Treasuries can maintain their attractiveness relative to many alternative investment vehicles (such as emerging markets), although some investors may look to alternative investment areas such as in Germany or Japan. Of course, such a default would be unprecedented and while we would expect mainly temporary repercussions, it is impossible to predict how the markets would react. From our perspective, taking a longer-term view, we would not expect to make significant changes to our pre-existing investment convictions reflected in our portfolios.

Submitted by: Jason Benowitz, CFA and Howard Potter, Senior Fixed Income Portfolio Manager



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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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