May 25, 2023
All eyes in the finance world are on the U.S. debt ceiling, and while Treasury Secretary Janet Yellen previously stated the country risks defaulting as early as June 1, some experts are more optimistic.
“Our guess right now is that the real deadline is probably June 8 or 9,” Alec Phillips, chief political economist at Goldman Sachs, told Bloomberg on May 19.
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That deadline is just days away and there’s no sign that the debate in Congress over raising the debt ceiling has made any progress.
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President Joe Biden and House speaker Kevin McCarthy both characterized their recent discussions over the issue as productive, but talks have yet to bear any fruit.
Meanwhile, some investors have started pricing in a default risk. The yields on Treasury bills set to mature on June 1 and June 6 have surged to over 7% as of May 24.
At this rate, it’s possible investors could react to the current situation in a similar fashion to the debt ceiling crisis of 2011, when markets dropped the closer the U.S. came to defaulting on its obligations.
Some stocks could serve as a safe haven under these circumstances.
Microsoft bonds
Treasuries are widely considered a safe option, but a default could test that theory. The next best option could be a corporate bond from a blue-chip American company with robust earnings, like Microsoft.
Microsoft’s bonds that are due on August 8th have a yield of just over 4% as of May 23, according to data cited by the Wall Street Journal. That means the blue-chip tech company is seen as more creditworthy than the government, at least in the short term.
The company also has a triple-A rating from both Moody’s and the S&P, which puts it on par with the U.S. government. The government’s rating, however, was famously lowered when debt ceiling negotiations hit crisis levels in 2011, so this factor is worthy of attention.
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Gold ETFs
Gold is a traditional safe haven that seems to hold up well when the U.S. looks less creditworthy. Gold ETFs, like SPDR Gold Shares, rallied in the summer of 2011 prior to President Barack Obama and House speaker John Boehner striking a deal just two days before the limit was expected to be breached.
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The SPDR Gold Shares ETF is flat this month. However, gold prices could rise as the deadline to raise the debt limit gets closer. Investors could seek shelter in this asset while the debate rages on.
Berkshire Hathaway
Warren Buffett may just be more creditworthy than Uncle Sam. After all, he’s the man most investors and policymakers turn to when banks are failing or a crisis is brewing.
In recent months, Buffett’s Berkshire Hathaway has been a net seller of stocks and a net buyer of Treasuries. He revealed at a shareholders meeting in early May that the company bought Treasury bills worth $7 billion in April alone and has another $3 billion in Treasuries with yields higher than 6%.
Altogether, the company has a jaw-dropping $130 billion on its books, which is earning higher interest payments as Treasury yields rise. Buffett himself has clearly said that he is not worried about a US debt default, which means he could see the short-term spikes in interest rates as an opportunity.
Berkshire stock currently trades at a price-to-book ratio of 1.39 as of May 25, which is close to Buffett’s old buyback threshold of 1.2. Investors seeking a safe haven may find the current valuation much more appealing.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
