In a recent op-ed (co-written with Viral Acharya) in Financial News (registration required for access), I discuss the unpredictable future of US treasuries. It is estimated that corporations are sitting on about $2 trillion in cash which are typically held in bank deposits, money market funds and US treasuries. Does the recent downgrading of US debt by Standard & Poor distort the perceptions of these corporations that US treasuries are still safe havens? What are the other investing options for corporations in case there is another downgrading of US treasuries by another rating agency, political turmoil or increase in inflation? Where would these monies go?
I believe that the alternative investment options are inadequate. Moving to money market funds is not an option as they frequently hold the same assets and financial papers as corporations and hence are prone to volatility when there are shocks to the economy. Bank deposits are also troublesome because they are rendered safe only to the extent that banks can rely on deposit insurance provided by the government. These guarantees will fall with the downward movement of US Treasuries.
Such a move away from the US Treasuries will impact the world economy in significant ways. Although reduced value of the US dollar might make some companies more export-competitive, the risk attached to the safe-haven status of Treasuries would trigger a sudden confidence crisis and affect the world economy. Hence, a worldwide flight away from US Treasuries would leave CFOs everywhere frantically searching for safe havens for corporate cash. In such cases, the move will be to real assets such as gold or platinum, perhaps pushing these metal prices to newer heights.
Professor of Finance and Stanley C. and
Joan J. Golder Chair in Corporate Finance