David, the real threat that that last week’s political impasse posed was not so much a federal defaulting on T-Bills. While no investment is truly free of risk, scenarios in which a major government with a long track record of stability defaults on its obligations are unlikely and therefore have no place in financial planning. Republicans were concerned that the US Government has reached its debt ceiling, a self-imposed limit on the amount it can borrow, and without an agreement to raise the limit (borrow more money) the threat surfaced of a ‘federal government shutdown.’
The real threat was that confidence in U.S. Treasury bonds would falter in a number of ways. First, by causing a disruption in the issuance of Treasury debt, as happened in 1995-96, a freeze would cause investors to seek alternative financial investments, perhaps causing a run on Treasuries. Such a run would increase the cost of U.S. debt, putting even more stress on our budget, and the resulting enormous capital flows would destabilize global financial markets.