“If you need to borrow money, you need the confidence of the markets to lend to you,” Martin said. The reason: If the economy turns south - or the unthinkable happens and the United States does default on its debt - those high-risk debt instruments will come under the most pressure. When it comes to your exposure to bonds other than Treasuries, Martin recommends sticking more heavily with high-quality investments, rather than corporate junk bonds or emerging market bonds. “They are still the most liquid investment and the safest investment out there,” Martin said. Those rates are currently running between 3.5% to 4%.Īnd to the extent there is any uncertainty about being paid on time by the Treasury, there may be a flight to 10-year Treasury bonds - which means their prices will go up, which can help buffer your portfolio. With the latter, “you face reinvestment risk down the road when it might be better to lock in rates with certainty now,” he said. ![]() If you’re invested in bond funds, check to see that the bond portion of your portfolio has adequate exposure to intermediate and longer-term bonds, rather than being too heavily weighted toward short-term higher yielding bonds. Those who have invested in Treasury bills maturing on or right after June 1 and who definitely need their money at that time - for example, to pay their own bills - might consider selling those bills now and reinvesting in bills that mature sooner, Martin suggested. So what, if anything, should bond investors do now? ![]() ![]() For bills maturing on or before May 30, yields have fallen and their prices have risen because investors are willing to pay up to have a near guarantee of prompt repayment, Martin noted. Right now, yields on one-month T bills are well above the yields for 10-year and 30-year Treasury bonds. “But with Treasuries, it’s more about ‘When will I get the money back?’” he said. In contrast to corporate debt, the risk is that a bond investor would only be able to recover a portion of their investment. The assumption is that even if the United States briefly goes past the X-date, it will resolve things quickly and will make good on all the payments it must make. That’s an important distinction from assuming they won’t be paid back in full, Martin notes. Short-term Treasury bills that mature on June 1 or soon thereafter have seen a spike in yields in the past month, indicating investors want to be paid more for taking on what they perceive to be higher risk that they may not be paid back on time. “We’ve already seen some pricing stress around short-term bills, Treasury bills, and a little bit of change in the… sovereign credit default swap spreads,” said Gary Gensler, chair of the Securities and Exchange Commission, at an event on Monday. But the lack of a deal to raise lawmakers’ self-imposed debt ceiling so close to the X-date is introducing unwanted risk into each investor’s calculus. Normally, US Treasuries are considered to be the world’s safest assets because they are backed by the full faith and credit of the United States. “As long as the discussions are ongoing between the Biden administration and Congress, we’d expect volatility to be relatively elevated,” said Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research.īond investors are all about pricing in the risk that they may not be paid back on debt they buy - either on time or at all. Win McNamee/Getty Imagesįirst on CNN: CEOs warn of 'devastating scenario' if America defaultsīut even if that’s the case, between now and then bond investors should expect volatility. ![]() Pedestrians walk inside newly installed "bike rack" barricades outside the U.S.
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