With the US government facing a debt ceiling impasse, the risk of a sovereign default is looming, and investors are looking for a safe haven to protect their portfolios. According to a recent survey by Bloomberg, gold is the top pick for investors seeking protection, with more than half of finance professionals saying they would buy it in the event of a default. US Treasuries were the second most popular asset, although there is some irony in that given they would be the very thing the US would default on.
The survey revealed that traditional haven currencies such as the Japanese yen and Swiss franc were also popular, but the US dollar and even Bitcoin were considered as alternative hedges. However, a sovereign default by the world's biggest economy should be unthinkable, but it is definitely thinkable right now.
While even pessimistic analysts see bill holders getting paid, albeit late, and in the most fraught debt crisis of previous years, Treasuries rallied even as the US had its top credit rating removed by Standard & Poor's. Even so, the risk is higher than before, given the polarization of the electorate and Congress, and the way both sides are so dug in. The cost of insuring against non-payment through one-year credit default swaps has surged well past levels seen in previous episodes, although they still suggest that the actual chance of a default is relatively slim.
If the debt ceiling fight goes down to the wire but the US doesn't default, a comfortable majority of investors in the survey think 10-year Treasuries will rally. However, professionals are split over what might happen if the US government actually tumbles over the precipice. About 60% of retail investors expect Treasury 10-year debt to weaken in the case of a default.
Investment professionals are less pessimistic on the outlook for the S&P 500 Index this time than retail traders. If there is a short period of default, the market reaction would put pressure on Congress to raise the debt ceiling, according to Priya Misra, head of rates strategy at TD Securities.
The debt ceiling impasse has already caused some harm to the dollar, and 41% of investors say its standing as the primary global reserve currency is at risk if the US defaults. An earlier survey showed that a majority of respondents see the dollar making up less than half of global reserves within a decade.
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