U.S. Able but Unwilling to Pay Bills: Analyst

BOSTON (TheStreet) -- The debt ceiling drama unfolding on Capitol Hill has sparked worries that the U.S. could default on its debt. One market strategist urges investors to understand that the debate over spending cuts vs. tax increases shows America's unwillingness to pay its debt, rather than the country's inability.

Kathy Jones, fixed income strategist with Charles Schwab, says that investors should not worry about the ability of the U.S. to pay its debt when considering fixed-income assets like U.S. Treasuries. She makes a clear distinction between what the U.S. can do and what the country is willing to do, and how that separates the country from other cash-strapped nations around the globe.

"This is not about the U.S. being unable to pay. This is about the U.S. being unwilling to pay on a specific date," Jones says. "I don't think anyone questions the ability of the U.S. to pay. It's the willingness. That's why it gets to be distressing as an investor, because it really isn't necessary to tie the debt ceiling to the longer-term deficit and budget talks."

Congress has an Aug. 2 deadline to raise the debt ceiling from the current $14.3 trillion limit. Already this month, the Treasury Department asserted that there would be "catastrophic economic and market consequences of a default crisis" if the debt limit is not raised in a timely manner.

Jones says that bickering by politicians has lead the U.S. into unknown territory here, with no clear predictions as to what will ultimately happen. Despite this uncertainty, Jones points out that the "U.S. is not Greece, which really doesn't have the money. The money is there. The Treasury is simply trying to manage to pay the bills that Congress has already approved."

"At Schwab, we don't actually believe there will be a default. We're not predicting a default," she says. "We still think it's a very small possibility. Our view is that there is room for them to work towards a solution and that this is a lot of political posturing."

That political posturing has lead to increased volatility that has affected even bond king Bill Gross, manager of the $240 billion Pimco Total Return Fund ( PTTAX). Earlier this year, Gross eliminated Pimco's exposure to U.S. Treasuries, effectively establishing a negative position by placing short bets against U.S. debt. Gross argued that Treasuryies are not an attractive investment because yields weren't high enough to offset the risk of inflation and U.S. government policies.

But in June, after he was hammered for missing this year's rally in Treasuries, Gross increased the fund's allocation to the asset class to 8% from 5%. In an op-ed in Thursday's Washington Post, Gross addresses the debt-ceiling battle by urging regulators to "raise it unencumbered if necessary."

"Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default," Gross wrote. "But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008."

Schwab's Jones highlights the risk that the cost of borrowing for the U.S. government will rise in the event of a default. "It doesn't mean it will rise permanently or significantly, depending on how this business plays out in Washington," she says. "But whether it's your credit score as an individual, or credit rating of a company or a credit rating of a sovereign government, if it drops, your borrowing costs go up."

For individual investors looking for guidance during this time of uncertainty, Jones assures that the 10-year Treasury is still safe, "although we can argue about whether the yield is attractive or not for a long-term investor."

Jones recommends that individual investors should keep a ladder portfolio "so they stretch maturities out over the yield curve, and you're not committing to one particular place. You'll have the longer-term securities that provide you income and short-term ones that you can roll over should rates rise."

For those investors looking for a little extra yield, Jones says they should consider high-grade, investment-grade corporate bonds. "They'll yield somewhat over Treasurys and they'll typically have very attractive credit ratings," she says. "The corporate sector has a lot of cash on the balance sheet and are in pretty good shape fundamentally, so a lot of investment-grade bonds are very attractive."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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