How Income Investors Can Lower Their US Debt Default Distress

AJ Rivers: An added element to the uncertainty in markets today is the debt ceiling and whether or not the US Treasury will run out of money to fund the US government. What do you think are the broader implications for investing markets?

Lucas Krupa: We think that the government will run out extraordinary measures sometime between July and October. The market’s going to try to figure out when that particular date is. I think the biggest implications would be in the T-bill markets where worried investors will trade around those maturities. I think it’s also important to note that if the government does default, it’s a technical default. You will still get paid back your principal and interest, just a matter of when.

AJ Rivers: Seems like every time there’s change of control in the House that the debt ceiling debate comes up, but it just seems to be a little bit more elevated in terms of tensions this year. What’s making this year so different in terms of potential debt ceilings in the past?

Matt Sheridan: To be honest, I don’t think it’s going to be that different. I think the political gamesmanship is going to be with us. You’re likely, similar to 2011, going to have capital-market volatility expressed in T-bill yields, expressed in credit spreads, expressed in capital markets broadly. The difference today, though, is that the backdrop for the banking system or systemic debt is just not as big of a concern as it was in 2011 with the European sovereign-debt crisis.

With that being said, building a portfolio that’s highly liquid, that’s short duration, that can play offense if credit spreads do widen or T-bill yields rise, to us is the optimal way to build income. Make sure you’re liquid; make sure you’re high quality; make sure you’re focused in liquid investment-grade corporate bonds. A focus in banks to us is pretty attractive. If T-bill yields rise because of political dysfunction, we will use that as an opportunity to add income to our clients.