NEW YORK — Scrambling to protect themselves against a U.S. default, investors are buying gold and foreign currencies, using derivatives to bet on a stock market collapse, and taking out complicated insurance policies.
They may want to consider crossing their fingers.
If the United States suddenly stiffed its creditors, the impact would be so widespread, complex and unpredictable that it is next to impossible to shield against steep losses, experts say.
A default could cause turmoil in the stock and bond markets, plus a replay of the fear that froze lending in the depths of the 2008 financial crisis. In the chaos, investments you’d think were a sure bet to fall might rise instead, and vice versa.
Consider the assets at the heart of the crisis — Treasury bonds. You would expect interest rates on Treasurys to rise the closer Washington gets to missing a debt payment. Investors would demand higher rates because of the greater risk they wouldn’t get their money back. After Argentina defaulted in 2002, foreign lenders required higher rates.
But some bond traders are betting the opposite will happen. They think nervous money managers could rush into Treasurys if Washington blows past the Aug. 2 deadline to raise the debt ceiling. The buying would push interest rates lower.
The logic behind this seemingly illogical reaction: Treasurys are widely traded around the world, with plenty of buyers and sellers ready at a moment’s notice, a quality known as liquidity. Investors like that, especially in a crisis, and may overlook fears of missed payments.
Gifford Combs, a portfolio manager at Dalton Investments, which manages $1.3 billion in assets, has been buying short-term Treasury bills for that reason. But he concedes he’s not sure what could happen in the event of a default.
“If there is a financial meltdown and panic, you don’t know where investors will go,” he said.
On the lookout for warning signs
Indicators to watch in the coming days for clues on how investors are getting ready for a U.S. default:
TREASURYS
If China, the largest foreign holder of Treasurys, loses faith in the U.S. government, bond yields will leap. The main Treasury to watch is the 10-year note. Its yield, which acts as a floor for mortgages and other lending rates throughout the economy, has hovered below 3 percent since June.
GOLD
Investors are piling into gold on fears of a U.S. default, pushing the price to $1,612 per troy ounce. But unlike a lot of metals, including silver and copper, there are few commercial uses for gold. That makes it difficult to guess just how much it really is worth.
STOCKS AND MUTUAL FUNDS
Most market analysts think a deal will be reached and haven’t laid out a strategy in case it’s not. “I don’t know how you could trade this in the short run except for waiting for greater clarity,” said Jonathan Golub, chief market strategist at UBS. Everyday investors do not appear to be making drastic changes to mutual-fund portfolios. In the week of July 13, the last week of data available, investors pulled $4.1 billion out of funds that invest in U.S. stocks, according to the Investment Company Institute, and moved $4.8 billion into bond funds in mid-July, a slight decrease from $6.1 billion the week before.
CURRENCIES
Monty Guild, head of Guild Investment Management in Los Angeles, says he’s trying to protect clients by buying currencies issued by countries that have been more prudent with spending. His top choices: Singapore dollars, Canadian dollars, Brazilian reals and Australian dollars.
