How To Profit From A Downgrade Of The US Credit Rating

Bank of China insignia and customer

Photo: AP Images

Regardless of whether President Barack Obama and the United States Congress can reach an agreement to avoid a default on American debt, it’s looking increasingly likely that the United Stated will finally lose its “AAA” credit rating.While President Obama and House Speaker John Boehner continue their high stakes game of chicken with the United States budget, investors have become progressively more worried that the two men will fail to reach a deal to raise the United States’ debt ceiling and avoid a potential financial disaster with worldwide ramifications.

Although America’s growing debt has long been considered unsustainable by many, the government always found a way to increase borrowing without losing its cherished “AAA” credit rating.

Even if President Obama and House Speaker John Boehner are able to reach a deal, Representative Boehner is losing support from within his own party for the deficit reduction plan that he is promoting.

Politicians with links to the Tea Party movement and conservative organisations such as the Heritage Foundation have voiced their disapproval of House Speaker John Boehner’s plan to reduce government spending, saying that the plan does not go far enough.

Making the chance of a deal even more unlikely was Senate Majority Leader Harry Reid’s statement that Boehner’s plan was “dead on arrival in the Senate, if they get it out of the House.”

Then of course there’s the possibility that whatever compromise eventually makes it out of Congress and onto the President’s desk will be vetoed by President Obama.

The markets have already priced in the risk of a potential default or downgrade but even if either is avoided the problems associated with America’s ballooning deficit are likely to remain, regardless of what short term compromise the President makes with Congress.

There are many investment options for investors depending on how they see the American debt crisis panning out.

If the United States does default on its debt or its credit rating is lowered, the ProShares UltraShort 20+ Year Treasury could move higher.

Investors who want to keep their money in equities may want to shift their funds overseas into faster growing economies whose governments are more fiscally responsible than the United States. The iShares FTSE China 25 Index Fund, the iShares MSCI Australia Index Fund and the iShares MSCI Singapore Index Fund are three global ETFs worth taking a look at.

China’s economy continues to impress, Australia benefits when commodities rise and Singapore’s government is the model of competent government planning. Each of these countries probably stands a better chance of thriving than America if the United States government’s credit rating is lowered.

If American debt is downgraded, than the US dollar will take a hit. Investors may want to move from dollars to a currency like the Swiss Franc by investing in the CurrencyShares Swiss Franc Trust. The Swiss Franc has been gaining in popularity among investors looking for a stable currency backed by a government that practices sound financial planning.

The United States Oil Fund is another option for investors who fear that American debt will soon be downgraded. Although the worldwide use of the dollar may falter in the event of an American downgrade, the world still runs on oil and demand for this commodity will be there no matter what happens to America’s credit rating.

If the United States is able to avoid a downgrade, the iShares Barclays 20 Year Treasury and the iShares Lehman 7-10 Year Treasury should move higher. The possibility of a default has already been priced into the market, so treasuries should rise if the downgrade never happens.

— Daniel James Hayden IV

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