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I have been back in the stock market aggressively since mid-09 and have reaped the rewards of riding the market up. Due to the enormous uncertainty around the end of QE2 and the debt ceiling vote (in addition to overall economic weakness), I moved my 401k investments into one of the safer investment option available- bonds- and plan to ride out the 2nd and 3rd quarter.
The bonds are a blend of US government, municipal, etc. Te other less risky option is an interest investment fund.
I am now wondering if - worse case scenario- the debt ceiling isn't raised and the US defaults or just begins making interest only payments on debt, will that rock the value of US bonds? I would think so but want some additional input.
Given the limited 401k choices I have for investment, where would you park your nestegg in the near-term future?
If you are losing sleep over this I would go to a "stable value" or "money manager" type fund, but EVEN THOSE did have a short blip of losses back in the worst of the '08 mess post Lehman Bros...
The "broad consensus" is that if the administration and the Congress SEEM to be moving toward agreement about some near term actual cuts in spending with no dramatic "over the cliff together" nonsense a week so delay might be a good thing -- it could prove that we are not like Greece or something other highly dysfunctional debtor that needs international intervention.
If the administration decides to get nutty, like say the Governor of Illinois, and threaten to withhold cash for ongoing obligations in an attempt to cajole law makers into doing something that has definite political winners and losers then all bets are off, as that could cause MANY investor to "pick up their marbles and find a new circle"...
I suppose there are other scenarios too, but since this is largely a POLITICAL SHOWDOWN for now and NOT a true financial crisis caused by scandal / dishonesty the odds of "shocking turns" is low...
The problem from any short term personal retirement standpoint is that many DOOFUS style "investors" will flood the retail markets with sell orders and the odds of something not unlike a "flash crash" being triggered is HIGH -- if you are big institutional investor / professional trader you could really make out like a bandit and go on a bargain hunting trip for the few minutes something like this might last.
Might be the kind of thing that makes leaving "well enough alone" for anyone that is not doing FULL TIME trading...
Bond rates would go up, but it would hardly be armageddon. Default because you can't come up with an agreement hurts credibility and would increase the risk premium some unknown amount, but its a far different issue from a government saying it basically has no intention of paying what it owes as dictated by the terms of its bonds. This fact never gets mentioned right now, too many rather enjoy the all or nothing nature of talking about a bond default even if its nothing like the real situation.
However it is a bit of a fear to think about because if the market acts orderly running up against the real deadline, it just makes politicians that much less likely to get something done. Maybe its good to talk about dire consequences if only to get these prancing idiots to stop treating every issue as a political football and to start governing.
In a word, "nothing" will happen to the value of the bonds. I agree with prior posters that, while the economy is doing poorly there is still demand for US debt because there's only a limited number of economies with as robust and safe a consumer society as we have the "luxury" of living in.
I wouldn't go all in on bonds ever. Nor would I settle for the 3.5% gains per year that stable value funds typically generate. I'd go for a blend. If your company has a balanced fund, I'd go for that. The markets are down 5% in the past month. That just means time to rebalance if you do it monthly.
I also agree on not doing active trading. Leave that to the pros.
Though if you are dead certain that Armageddon WILL ABSOLUTELY HAPPEN!!!!!1111!!~~!!@!~!111, then by all means, go for the stable value fund. Or don't save anything and buy up gold.
Doubtful that gold will become a settlement medium. Nobody will agree on how valuable it is at that point.
If armageddon is coming your best bet is to take a loan out on your investments and then purchase a shotgun with lots of ammo, bottled water, and canned goods for at least a year. After that read up on the CDC's what to do during a zombie apocalypse attack for pointers.
If the govt "reschedules" its interest in any substantial way, it will be Great Depression II - probably worse.
A default would send real long-term US borrowing rates through the roof and would erode our status as the world's reserve currency (which would further increase borrowing rates.) From the late 2020's onward, the interest on our national debt begins to go hyperbolic. It's actually a bigger problem than medicare. This says nothing of the geopolitical problems it will cause.
If I thought it were an issue, I would consider unhedged foreign investments because of currency risk. Mainly though, I would hold cash and start paying down any debt asap, as we would see a tidal wave of deflation from the inevitable credit shock.
The fact that most Republicans and even some Treasury officials downplay the consequences is amazing. On this, the American public is either totally clueless or indifferent.
All that being said, a default isn't likely. The bigger risk is the brinkmanship, which brings on a credit downgrade. If that happens, go ahead and take 2012 and most of 2013 off the calender. We won't recover until 2014. I'd give a default a 2% chance. A downgrade, a 15%.
You have to look at history for the answer, as many other countries have gone the same path - EVEN THE UNITED STATES with the continental currency. Look up countries like Argentina and Zimbabwe.
Basically the way it works is that the government runs deficits and in the process they use bonds to finance operations. This process may continue for awhile. Eventually financials through bonds does not occur fast enough (can't raise enough money). So the central banks resort to printing up money. Once again, this process may last awhile as the underlying value of the currency is extracted from current holders to the government.
And then....major holders of bonds and currency backed securities get spooked and quickly sell their currency backed assets and move them into something else. This process lasts about 24-48 hours. At this time the inflation rate will be in the millions of percent. After, anyone holding bonds or currency will be completely wiped out.
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