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US Default Could Benefit Treasury Investors

Thursday, 21 Jul 2011 | 9:03 AM ET

All eyes are turned towards the clock as the August 2 deadline for the US debt talks approaches. Treasurys investors could stand to benefit if Congress cannot agree to raise the debt ceiling, Robbert Van Batenburg, head of equity research at Louis Capital Markets told CNBC on Thursday

Jonathan D. Colman

The duel between Republicans and Democrats over the budget and debt ceiling has raised concerns among investors that the United States may default.

"It's sort of like… when you're dealing with exams," Van Batenburg explained. "You're only going to study for your exams the last day, before you have to take it. The policymakers in the United States are all going to be serious about budget cuts in the final days before the US is going into default."

If the US does default, he explained, it will not be because the government exhausted its tax money, but because the Treasury cannot issue any more bonds.

"There's excessive demand for those bills," Van Batenburg said, "You've got the Chinese, you've got the Japanese; the social security system, you've got the pension funds, you've got insurance, mutuals… I mean everybody wants—and needs—to own these treasuries. So there is enough demand out there, it's just there's not enough supply any more."

Clock Ticking on US Debt Debate
"It's sort of like when you're dealing with exams; you're only going to study for the exam on the last day before you have to take it," Robbert Van Batenburg, head of equity research at Louis Capital Markets told CNBC. "The policy makers in the United States are only going to be serious about budget cuts in the final days before the U.S. is going to go into a default," he said.

Paradoxically, these never-ending debt talks may explain also why the treasuries market is doing so well.

"It seems almost counterintuitive, but if the Treasury Department cannot issue treasuries anymore because they're bumping up against the debt ceiling," Van Batenburg said, "then obviously, supply will be exhausted, and marginal buyers will continue to buy treasuries."

Another criterion also plays a role in the strong US treasuries: the country's sluggish growth.

"The outlook growth has diminished significantly. So if growth goes down, treasuries go up," he explained, "So in this space, where you have a risk-off kind of environment, people are looking into buying treasuries or gold . I think those are the kind of places where you want to be."

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