So according to CFAI COE, we are allowed to state that “US Treasuries are virtually risk free” right? I have a feeling the new standards of practice WONT allow this, as it will become a violation due to the inherent risk of US govt stability (debt burden, downgrade risk and political stability) and market manipulation btw the Fed and various monetary authorities to help implement expansionary monetary policy…guess the idea of having a floating currency system supposedly controlled by supply and demand is flawed by govenment intervention by the US! for those who have a tax background or interested in finance: www.wegelin.ch/download/medien/presse/kom_265en.pdf Curious to hear peoples opinions on this?
You’re right about the statement. I think you’re specifically referencing a problem in the SOPH that says, “The payment of the bonds is guaranteed by the U.S. government; therefore, the default risk of the bonds is virtually zero.” You’re feeling could be possible if things take a serious downturn. But one question, is there going to be a new SOPH soon?
I always disagreed with the 10-Year Treasury being referred to as Risk Free for corporate finance purposes anyway, considering you’re facing interest rate risk, reinvestment risk, purchasing power risk etc. From a default risk perspective, I would still agree with considering Treasuries risk free though as the US Government can for all intents and purposes just print money if they absolutely had no other choice in retiring bonds. The value of that currency would be another question though of course.
Unless you proportionately bought all the world’s currencies, don’t you face purchasing power risk on everything?
I believe, but i’m not sure, that CFAI requires/strongly prefers that you say virtually default risk free. As there is a possibility, as we saw not too long ago that short term treasuries can have a negative yield even if purchased at par. Plus there is always reinvestment risk (with notes and bonds) as well as purchasing power risk. Just my $.02.
If the US defaults on debt, we’ll have more serious problems than what CFAI thinks about something.
3 Month T-Bills traded at a premium, remember they’re zeros, back in the '08 fiasco. I think they traded as high as $100.02. So based on that alone I wouldn’t say that treasuries are entirely risk free. TNotes and TBonds maybe.
the whole thing with T-bills being “risk free” is in terms of principal protection. nothing more, nothing less.
As long as the US controls its printer for printing money, it is default free I suppose…The USD may be worthless, but you will get your money back in USD. 
I dont buy the argument that the USD will ever be worthless, it will devalue, but other currencies will devalue with it. 70% of forex market is USD driven and most commodities are USD denominated, add to that the Eurozone is in serious trouble and there are arguments favoring discontinuation of the EURO in the long term, which leaves the USD with an even bigger market share. A lot of countries(emerging markets dependent on US demand) peg their exchange rate to the dollar so you print more USD, sure it devalues the USD, but you also have other countries print their local currencies, devaluating currencies worldwide, with some currencies outperorming and some underperofrmin relative to the dollar. The only situation where I see the impact of USD diminishing is a return to the gold system which will probably never happen and emergence of a new Euro like currency but judging by the performance of the Euro, it seems unlikely. Considering the UK has recently come out with its own budget deficit and need for rebalancing the GBP will struggle and lose some of its gains relative to the dollar. P.s. Most of my comments are based on my understanding of what I see happneing around the world and intuition. Please feel free to correct me
nomad_SA Wrote: ------------------------------------------------------- > I dont buy the argument that the USD will ever be > worthless Just give Obama a 2nd term…
EastCoastJ Wrote: ------------------------------------------------------- > I always disagreed with the 10-Year Treasury being > referred to as Risk Free for corporate finance > purposes anyway, considering you’re facing > interest rate risk, reinvestment risk, purchasing > power risk etc. > > From a default risk perspective, I would still > agree with considering Treasuries risk free though > as the US Government can for all intents and > purposes just print money if they absolutely had > no other choice in retiring bonds. The value of > that currency would be another question though of > course. I agree, for all intensive purposes 10 yr instruments seem pretty inapropriate if used with a risk free prespective…