On its face, the probability of the U.S. defaulting on its spiraling debts seems highly unlikely. But that’s not what the markets think. The price of insurance against such a default—using derivatives known as credit default swaps—has jumped by more than 50% in the private market in recent months. According to CMA DataVision in London, a specialist in these contracts, it will now cost you 0.34% of the principal per year to buy default insurance on U.S. government bonds. If you held $1 million in Treasurys, insuring against default would cost you $3,400 for the year. A few months back, insuring those bonds would’ve cost less than $2,000.
Not exactly a vote of confidence in Uncle Sam. Now, as the author of the linked piece goes on to note, an actual default on US bonds is highly unlikely – but there’s nothing stopping Obama and the Fed from forcing in a round of inflation, thus making the bonds we currently hold functionally worthless, and thus easy for the government to pay back. For as long as the US has issued bonds, our bonds have been the gold standard – the “risk free” investment. But, are they really?
I will review my decision to go in to bonds – perhaps I’ll find somewhere else to park my money.
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