Investors Seek Protection, As Debt-Ceiling Drags

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Scrambling to protect themselves against a United States default, investors are buying gold and foreign currencies, using derivatives to bet on a stock market collapse and taking out complicated insurance policies.

They may want to consider crossing their fingers.

If the United States suddenly stiffed its creditors, the impact would be so widespread, complex and unpredictable that it is next to impossible to shield against steep losses, experts say.

A default could cause turmoil in the stock and bond markets, plus a replay of the fear that froze lending in the depths of the 2008 financial crisis. In the chaos, investments you’d think were a sure bet to fall might rise instead, and vice versa Associated Press Reports.

Consider the assets at the heart of the crisis — Treasury bonds. You would expect interest rates on Treasurys to rise the closer Washington gets to missing a debt payment. Investors would demand higher rates because of the greater risk they wouldn’t get their money back. After Argentina defaulted in 2002, foreign lenders required higher rates.

Stocks Concerns about the debt ceiling haven’t hampered the stock market yet. The Dow Jones industrial average twice jumped by more than 100 points over the last week thanks to strong corporate earnings from Microsoft, IBM and Coca-Cola. But most market analysts think a deal will be reached and haven’t laid out a strategy in case it’s not. “I don’t know how you could trade this in the short run except for waiting for greater clarity,” says Jonathan Golub, chief market strategist at UBS.