This piece of comparative calm is very definitely to be read in conjunction with Cardiff's post on how the Treasury's payment system (might) work. It's to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a "delayed component" and a "normal component" . Pity the EM sovereign with such sloppy protections, eh? [Also -- Joseph/ed here by the way -- isn't this whole situation kind of crappy for creditor rights? Why should the United States get this exorbitant privilege in bond contract? Other sovereign debtors must labour under not only cross-default clauses, but negative pledge, pari passu protection, waivers of immunity, and so on. Sovereign debt is not easy to enforce. It is political risk. Why do we let this feckless, ungovernable Western Hemisphere debtor get away with practically naked contractual protection for its investors? Folks, it ain't right.] As Cardiff noted, the start of November is when things might start to get really problematic for the Treasury. HSBC's Steven Major agrees: Large payments due on 1 November for government pensions and Social Security (see Table 1) could push the US Treasury into a negative cash flow position around this time and there is a risk that a missed or delayed payment would fall on 31 October. Table 2 shows the maturing Treasury bills and bonds through to mid-November, all of which face uncertainty if the Treasury delays payment. Already there are questions on how they would be tracked in back office systems, how they could be financed, and if holders would receive interest after they mature but are not paid. This uncertainty alone may prompt investors to switch to other bonds, creating a liquidity premium for these other bonds on similar parts of the yield curve. If the coupons and bills were extended, as SIFMA recommends, holders would face issues with financing and liquidity but, as long as investors expect to be paid, in full and soon, we expect the discounts would be limited. The problems created for holders of such securities, would be far less systemic than those arising from a true default and bankruptcy. But here's the more significant chunk from Major, with our emphasis: There are various reasons to believe that the impact of a US Treasury payment delay on the US bond markets may well be a managed disruption, not a catastrophe. We highlight the following: No cross-default: This means that bonds without delayed payments will continue to trade as usual Bonds can be split up: Even those bonds that might have payment delays can be split up or "stripped" into the delayed component and the "normal" component Market efforts to manage the knock-on effects of delayed payments, such as SIFMA guidelines, are in place to handle settlement system adjustments. There are no cross-defaults on US Treasuries - which means that if one security delays payment it does not trigger the default of another. This effect is shown in the treatment of bonds with delayed coupons in the SIFMA plan and it should help to limit knock-on effects in the bond market... Already, the debt markets are distinguishing between issues that might face payment delays and those that are unlikely to (see Figure 4). Longer-maturity bills and bonds with coupons which are expected to be outside of any missedpayment window, have maintained value. We would expect this distinction to persist in the event of an actual payment delay... Figure 6 shows that the affected bonds could potentially increase to over USD3trn by 15 November, representing one-quarter of the USD11.9trn of publicly held Treasury debt. But, the potentially delayed coupons (which amount to only USD35bn: USD6bn for 31 October and USD29bn for the 15 November) would trade separately from the underlying Treasury, and the latter should therefore trade relatively normally. If the delayed coupon is stripped from the rest of the bond (as it is owed to the holder of record), then the rest of the bond's cash flows look like those of any other bond that has no coupon delay ie the bond could continue to be traded as if there were no delay. As already highlighted above, yields of longer maturity bonds with no delay risk have been unaffected so far. However, this does assume no accounting or regulatory issues develop for a delayed or "selectively defaulted" US Treasury. Some more comfort can be found in the fact that the payment for a portion of a 1979 T-bill was delayed for a few days for a number of unusual reasons, and the US survived. But as Cardiff's post amply demonstrated, much is uncertain and there's no point pretending otherwise. More, including those SIFMA guidelines mentioned above, CDS and repo musings, in the usual place.