BlackRock's Tucker: Default Might Spark Treasury Sell-Off

Thursday, 10 Oct 2013 08:02 AM

By Michael Kling

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In 2011, the last time Congress struggled with raising the debt ceiling and flirted with default, stocks slumped and Treasurys jumped as investors ironically fled to government debt as a safe haven.

Don't count on that happening this year, cautions Matt Tucker, head of iShares fixed-income strategy for BlackRock.

Instead of rushing into Treasurys, investors might actually dump government debt, Tucker tells CNBC.

Editor’s Note:
Obama Donor Banned This Message (Shocking)

"The difference here is that in 2011, we had a lot of concern about what was happening in Washington. This triggered a flight to safety, and Treasurys rallied," he explains.

"If we actually saw a default, whether it was a technical or otherwise default by the Treasury, that could be a very different reaction. You actually could see a more mixed response from Treasurys, even a sell-off."

Already, rates for short-term Treasury bills have jumped, as investors fear their interest payments could be delayed. Treasury bills maturing Oct. 31, he notes, have a higher yield than do bills maturing in January.

"The fact that the October T-bill is trading so high is a reflection of the uncertainty people have about the government making its payments."

Worst of all, the debt ceiling impasse may push up rates for good and threaten the U.S. dollar's role as the world's reserve currency, he warns.

"I think events like we saw in 2011 are weakening that role [as the reserve currency] and creating the possibility that some other major sovereign issuer could step in as being that global, flight-to-safety instrument," Tucker tells CNBC. "And I think that creates a real threat to the Treasury and its ability to finance itself long term."

Still, Tucker predicts yields won't increase much by the end of the year because the Federal Reserve will not start tapering its bond-buying stimulus until next year.

On Tuesday, yields for Treasury bills maturing Oct. 31 reached 0.35 percent, the highest since October 2008, due to concerns of a government default. Default fears were also evident at a Treasury Department auction for new four-week bills maturing Nov. 7, according to The Wall Street Journal. Yields were 0.35 percent, the highest in five years.

"It was an awful auction," Priya Misra, head of U.S. rates strategy research at Bank of America Merrill Lynch, tells The Journal.

Editor’s Note:
Obama Donor Banned This Message (Shocking)

Related Stories:

Shutdown, Default Threat May Give Treasurys a Short-term Lift

US Default Seen as Catastrophe Dwarfing Lehman's Demise

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