Saturday, July 30, 2011

Dooms day coming? Investors are now hedging against US debt default

US government is just a few days away from a default deadline, as warring politicians have not yet come to an agreement to raise the borrowing limit of the federal government. A few hours back the vote for debt bill in the Congress got delayed. So where are we heading?

As seen in the video given below investors, traders and executives across the globe are now starting to hedge for what was once unthinkable. Banks and money market funds are starting to hoard cash while businesses become even more wary about spending money.

There is also the worry about the impact of a downgrading of US debt by the global credit rating agencies. The US is the largest issuer of triple-A debt in the world, the issuer of the global currency and most bond prices around the world are benchmarked to the yield on US treasuries. Treasures and bonds make up the majority holdings of most of the conservative portfolios and there could be huge portfolio adjustments across the world if the US loses its top-notch rating. People may rush to put their money into safer physical assets like gold, oil and other metals driving their prices high.

Having said all that, I still believe that the US will come out of this unscathed but it might go to the wire. Democrats and Republicans are going to toil it out till the last moment to decide whether to increase income tax and an estate tax of the rich or to cut humanitarian social welfare or both.