How to protect your investments in the debt ceiling standoff

New York CNN

Nobody can tell you when the US Treasury will no longer be in a position to pay the United States' bills on time and fully if the lawmakers do not raise the debt ceiling.

The 'X date' is estimated to fall between early June and the beginning of August.

Bond market analysts still expect that lawmakers will strike a deal, even if it is only at the eleventh hour and 59th minutes before the X date.

..... Libby Cantrill is the managing director of PIMCO and head of its public policy. She said: "We remain confident that a deal can be reached in time to prevent any breach."

Even if this is the case, bond investors can expect volatility between now and then.

Collin Martin is the director and fixed income analyst at the Schwab Center for Financial Research.

Investors in bonds are concerned with calculating the risk of not being paid back for debt they purchase, either on time or ever. US Treasuries, which are backed with the full faith of the United States, are generally considered the safest asset in the world. The lack of a deal on raising the self-imposed ceiling for the debt by lawmakers so close to the X date is a risk that investors should be aware of.

Gary Gensler said at an event held on Monday that he had already noticed some price stress in short-term bills and Treasury bills. He also noted a slight change in sovereign credit default swaps spreads.

In the last month, yields on short-term Treasury Bills that mature June 1 or shortly thereafter have risen. This indicates that investors are willing to pay more to take on what they believe is a higher risk of not being paid on time.

Martin points out that this is a very different thing from assuming the debts will not be repaid in full. Martin notes that the assumption is made that, even if America briefly extends the X date, they will quickly resolve the situation and make all payments due. Bond investors are at risk of only recovering a small portion of their initial investment, unlike corporate debt. "But with Treasury bonds, it's about 'When can I expect to get my money back? He said.

The yields of one-month Treasury bills are currently higher than those on 10-year and 30-year Treasury Bonds. Martin said that for bills maturing before or on May 30, yields are down and prices are up because investors want to be assured of timely repayment.

What should bond investors be doing now, if any?

Martin suggests that those who invested in Treasury Bills that will mature on or after June 1, and who need the money to pay for their bills, could sell them now and reinvest in bills that are due sooner.

Check that your bond fund portfolio is not too heavily geared towards short-term, higher-yielding bonds. He said that if you choose the latter option, "you may be exposed to reinvestment risks in the future when it would be better for you to lock rates now." These rates range from 3.5% to 4.0%.

If there's any doubt about the Treasury paying on time, the price of 10-year Treasury Bonds may rise, helping to protect your portfolio. Martin says that 10-year Treasury bonds are the safest and most liquid investments available.

Martin suggests that you stick to high-quality bonds, and not corporate junk bonds, or emerging market bonds, when it comes to your bond exposure. Why? If the economy goes south, or if the unthinkable occurs and the United States defaults on its debt, those high-risk instruments will be the ones most affected.

Martin stated that if you want to borrow money you will need the confidence from the markets. There will be less trust if there is a recession, or if there are concerns about the Treasury repaying investors on time.

Martin says that the best thing to do for your 401(k) is to examine your equity-to bond allocation and make any necessary adjustments. Stocks are expected to be more volatile as we get closer to June because they are riskier than bonds.

Jessica Schifalacqua, spokesperson for Vanguard, says that the company also advises investors to consider the long-term outlook when making investments.

Our general advice is that investors should maintain a portfolio balanced in line with their goals, and remain disciplined. 'A long-term perspective is particularly important during times of uncertainty, said she.