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Debt Ceiling Prepping – It’s Time to Consider Doing These 2 Things

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Debt-Ceiling1My base case for the debt ceiling drama is still that a debt default will be avoided. This includes defaulting on either interest payments or principal payments (the bigger risk is principal payments). With that said, however, the inability of those in power to thus far completely put to rest the risk of a debt default will force some investors to take certain actions to protect their assets.

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A debt default would most likely cause a severe reaction in the financial markets. As we get closer to the debt ceiling deadline, some investors may decide to sell certain assets, while others might purchase put options to protect against downside risks. Those will be decisions that each of us will have to make for ourselves based on our own specific investment objectives. Two things, however, that I think every investor should strongly consider doing are the following:

  1. Move your money out of money markets that have exposure to U.S. government debt. Take the time to find out if your money market holds U.S. government securities (there’s a very good chance it does), and, if so, move your money out of it within the next week. If there is a debt default, the likelihood of many money markets breaking the buck is quite high. There is even the possibility of large price swings in Treasury bills that occur absent a default disrupting money markets. You can always move the money back after it is clear that there will be no debt default. This is something that takes very little time to do and, given the near-zero interest rates money markets are paying, might actually make you a little money, depending on where you move the money.
  1. If your money market has U.S. government debt exposure, make sure you do not have any securities purchases that settle after October 16. Money markets are used as sweep accounts in the brokerage industry. But if many money markets are likely to break the buck in the event of a U.S. government debt default, then you couldn’t be 100% certain that the funds you have appropriated to settle purchases would actually be there upon settlement. The other option, for those who want to make purchases that will settle after October 16, is to make sure you have sufficient funds to cover the difference if your money market breaks the buck and you have to put up more money to cover a trade.

Investors did not force elected officials to wait until the last days to deal with the debt ceiling. But those in power, by waiting so long, are forcing investors to react to the uncertainty. Some people may consider it unnecessary to take the simple steps of your moving money out of money markets that hold U.S. government debt and making sure you don’t have purchases settling after October 16 (until such time as the possibility of a U.S. government debt default is eliminated). I view it as prudent planning, acting rationally, and responsibly managing portfolio risk. Even though a U.S. government debt default is still not my base case, with each passing day, the possibility of it occurring becomes more real. The two steps mentioned above take so little effort to do and so little effort to undo that they just make sense.

On a closing note, I would like to direct your attention to Sec. 138 of H.J. Res. 59 (Continuing Appropriations Resolution, 2014). One thing you perhaps have not heard in the media regarding the continuing resolution is that Sec. 138 exempts the principal and interest of U.S. government debt from the debt ceiling. As you think about the strategic decision making that is occurring in Washington, D.C. regarding the government shutdown and debt ceiling, keep Sec. 138 of H.J. Res. 59 in mind. A U.S. government debt default can be taken off the table without having to raise the debt ceiling. Whether that happens is a different story. But it can happen.

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