I have T-bills. What happens if the U.S. defaults?

Discussion in 'Economics' started by wilburbear, Jul 14, 2011.

  1. zdreg

    zdreg

    everything else being equal which it never is what happens to TIP (tips exchange traded etf) if the market believes default is inevitable and upon actual default?
     
    #31     Jul 15, 2011
  2. If the mkt seriously doubts the long-term creditworthiness of the US as a result of the default (i.e. it's perceived as a more "real", rather than "technical"), TIPS underperform nominals, because TIPS is a more credit-intensive instrument, by construction. If the mkt believes that the disruption has a tangible effect on economic activity (like Leh), TIPS will also underperform the nominals. In both of the cases above, breakeven inflation goes down.

    If the mkt seriously thinks that the biggest impact will be felt in the dollar, then TIPS may actually outperform nominals, i.e. breakevens will rally.

    Does that answer your question?
     
    #32     Jul 15, 2011
  3. zdreg

    zdreg

    perhaps. in these kinds of situations one should reread the prospectus of the relevant ETF.
     
    #33     Jul 15, 2011
  4. Indeed... The most important thing that people often miss about TIPS is that a TIPS, while inflation-linked, is still a bond. So the only thing you can be somewhat certain about is that TIPS will outperform nominals during inflationary episodes. Whether TIPS will rally or sell off in absolute terms is totally uncertain.
     
    #34     Jul 15, 2011
  5. schizo

    schizo

    As such, it's better to invest in gold (or any other commodity) than TIPS.
     
    #35     Jul 15, 2011
  6. :D
     
    #36     Jul 15, 2011
  7. Also, I should definitely note that, with all inflation-linked bonds, there's also potential that a sufficiently dysfunctional government may be tempted to "massage" the calculation of the index, thus defrauding investors. This is certainly not the central scenario with TIPS, but the possibility is there and should be taken into account. The recent lawsuits and fines that the Argentinian government is slapping on some economic consultancies for casting doubt on official CPI is a pretty alarming case in point.
     
    #37     Jul 15, 2011
  8. Well, if you feel that these commodities are liquid enough (gold is, I guess) and that you can achieve sufficient diversification that way, sure.
     
    #38     Jul 15, 2011
  9. jem

    jem

    its a fair question. When I traded for a living I stayed away from etfs as I prefer to trade futures (or options) and stocks

    However, I am now quasi managing a much larger portfolio than I am accustomed to.

    It was the account of profitable trader who died a month ago.

    about a month ago, I cut out all the stock and stayed long his tips and commodity etfs.

    so now I have a bit of a cushion... I am willing to risk the profits so to speak... but I do not really wish to lose much principle

    I have figure out how much downside the portfolio and then balance that risk vs... hedging against inflation.

    I appreciate the info so far.
     
    #39     Jul 15, 2011
  10. jem

    jem

    I meant it was a good question to ask my familiarity with etfs.
     
    #40     Jul 15, 2011