At Henssler Financial, we reject the notion that “the United States will probably default” on the debt one month, or even for one second. Looking at history, there have been almost 100 occasions when the government raised the debt ceiling since its enactment in 1917.
We are not alone in our belief that the current leaders are unwilling to cause the first ever default on U.S. Treasury debt, which would cause untold harm to the “full faith and credit of the U.S. government.” Global financial markets have signaled their belief that the United States will not default on its debt in that the rates dictated by those markets are very low and have fallen in the past month. Using the financial notion that increased risk of loss will dictate higher yields (lower prices), the market is either ignoring what is happening in Congress, or the collective traders that make up that market do not believe a default will occur.
For a reference of what rates a near-default sovereign government’s debt would trade at on the global markets, let’s look at current Greek debt. Even after securing the next tranche of debt to finance their operations for the next two years, three-month Greek bonds are currently yielding 8.8%, while the three-month U.S. Treasury is at 0.025%; two-year Greek debt is selling at 28.96%, while the U.S. Treasury is at 0.355% at the same maturity. Again, low yields denote high demand. The European debt crisis has caused the decline in U.S. Treasury yields over the past month with global investors looking for safety.
Ultimately, we believe Congress understands the paramount importance to the credibility of the financial status of our country. Looking back three months to the budget debate, these same politicians waited until the last possible moment to pass the budget and avoid a government shutdown—an event that has occurred previously. There is nothing they can gain politically by forcing a default on the debt.
To protect client assets from dire market conditions, lately we have significantly increased the portfolio weightings in consumer staples, a sector that frequently provides solace from volatile markets. We have greatly reduced the portfolio weighting in banking to avoid what we believe is a sour spot in the market brought on by heightened regulatory environment and the potential for higher yields in the future. Ultimately, in the event of a U.S. debt default, there would be few places to hide. Even if all stocks and bonds were sold, holding cash could be a negative as the U.S. dollar would likely decline in value relative to other global currencies. But, as noted earlier, the euro has weakened on negative debt news.
Our belief is that Congress and the President will do what it takes to save the financial system. This is the basis for our actions at this time. As always, we encourage the use of our Ten Year Rule to avoid stock market volatility for assets needed for spending in the next 10 years.