The risk of a Treasury debt default makes people worry that their 401k will be hurt. Some people have asked should they buy a credit default swap (CDS) insurance on their 401k? The answer is that you can’t do this and even if you could it would not be applicable. A CDS is like a “Put” option on a bond. If the bond goes down in value because of default the CDS insurance protects you from loss. But CDS are only available in a business-to-business transaction, meaning a transaction on an institutional basis. In addition most 401k’s hold mutual funds, not individual bonds and CDS don’t cover mutual funds. People should use independent financial research to understand these concepts.
Possible solutions to protect a 401k from the risk of a Treasury default would be to invest in high quality investment grade assets. This means avoiding junk bonds, and junk quality stocks. These stocks often have high PE ratios, low return on equity, low return on assets, unstable earnings, large debts, no corporate moat, and in some cases an excessively large dividend payout with no retained earnings.
Since 401k’s usually only offer mutual funds then you need to find a fund in your 401k that has a track record of cautious, conservative investing and which has a minimal amount of junk quality assets. Possible signs of this might include funds with lower than average standard deviation, higher than average Sharpe ratios.
A key idea about a Treasury default is to avoid panic so that you can think clearly. Don’t buy gold or foreign currency. Don’t hoard paper money. The Federal Reserve was able to fix some problems with the Lehman crash in 2008 so they may be able to assist the Treasury department if a default occurred. I have previously suggested the Treasury could sell its gold to the Federal Reserve and this would not violate the debt ceiling and would not require the gold to be sold on the marketplace. The gold could be held at the same place where it is now, it would simply have a new owner, which would be the Federal Reserve, who would have to pay rent (including a large deposit of prepaid rent) to the Treasury to store the gold. In case the laws say that the Federal Reserve is only allowed to own bonds and bills then the gold can be sold to a non-profit “purpose” trust that issues bonds that are bought by the Federal Reserve. A similar approach was used during the 2008 crisis when special investment vehicles were created that the Fed loaned money to. These vehicles contained the assets of bonds that were of far worse quality than gold. Of course that is a temporary solution because in three to six months the deficit will consume the proceeds of the sale.
There is every reason to think that Congress will be able to reach a solution. The hardcore Tea Party members in Congress seem to be unable to create political gravitas and momentum and may decide it is best to compromise and to cooperate with raising the debt ceiling. The U.S. political tradition is that dramatic “single-issue” candidates usually fade away pretty quickly and that successful movements, parties, and candidates have a well thought out comprehensive marketing plan in the form of a well-rounded, balanced political program. Thus I expect the Tea Party wing to retreat and compromise. Even if Congress misses the very important November 1 monthly debt payment deadline the Treasury department may be able to prioritize debt payments.
Investors should use independent financial research to get a clear picture. I wrote an article “How to protect your 401k from a Treasury default”.Investors should seek independent financial research by an independent investment advisor which is best delivered by a fee-only financial advisor.

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