Would Anyone Buy “Illegal” Treasuries?


A lot of people seem to be skeptical of the idea that Tim Geithner could issue Treasury bonds even after the debt ceiling was breached.

Would there really be a market for “illegal” Treasuries?

Of course there would.

One of the key things to remember is that people buy US government debt when they are fearful. It is still the landing pad of choice for those who take off on a flight to safety.

This can have surprising results. When Standard & Poor’s warned that it might downgrade the credit rating of the US, bonds actually rallied. That doesn’t happen with most other sovereign or corporate issuers—for them, a warning about a downgrade usually triggers a sell-off. But debt of the US Treasury is different.

The only thing you had to know to correctly predict the reaction to the S&P news was that a potential downgrade is scary. And when things get scary, the demand for Treasuries goes up.

If the US Congress reaches an impasse on the debt limit, that will be scary. People will buy bonds—even if those bonds are temporarily illegal. (Note: I think that there is only a very, very remote chance that we’ll come anywhere close to this.)


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