The downgrade by Moody’s of the credit of the United States has some folks thinking about whether to continue to invest in Treasuries. If you are a public funds treasurer the answer seems pretty simple, though the reasoning may be a bit complex/convoluted.

For one thing, for most public agencies investment authority is limited to US dollar-denominated securities.  This means that ultimately whether the security is a Treasury, a corporate bond, or a bank instrument the issuer will pay you in U.S dollars. Dollars are a fiat currency—they are not backed by anything other than the promise of Uncle Sam to pay or make good on their value. No silver/ no gold, nothing else.

Think of short-term Treasuries as dollars with an interest rate attached. Could Treasuries default but dollars retain their value? That seems highly unlikely. So, if you were to invest in a dollar-denominated corporate bond or put your money into a U.S. bank deposit account you would not eliminate your exposure to dollars. In a default situation a dollar and a short-term Treasury obligation should have the same (much diminished) value in exchange for goods and services.

In a few words it is hard to see how the value of short-term Treasuries would be different than the value of dollars.

A few organizations are rated higher than the United States. Johnson and Johnson and Microsoft currently have Aaa ratings from Moody’s. So do 16 states and a number of local governments. Credit ratings consider capacity to pay debt and willingness to do so. You could argue that these entities have demonstrated a willingness to meet their obligations that is stronger than that of Washington, but how about capacity? Putting aside the ratings, would you rather have an obligation of a pharmaceutical company or the sovereign United States?

Some have suggested investing in Fannie Mae, Freddie Mac, or the FHL Banks. They retained their Aaa rating for a brief instant after Moody’s downgraded the U.S. but they are now rated Aa1. Their credit is closely tied to that of the U.S. In fact, two of them—Fannie Mae and Freddie Mac—might be considered wards of Washington. And to complicate things further the Trump administration is actively considering privatizing these, so their future is uncertain.

There are a few supranational organizations like the World Bank and its affiliates that maintain triple A ratings and issue bonds denominated in dollars. These could be a refuge for those who worry about Treasuries. But they are not permitted investments in many localities, and they are outstanding in much smaller amounts than Treasuries or issues of many Federal agencies. Then there is the possibility that those who question investments in Treasuries are unlikely to be comfortable with investing in a supranational organization that is not under the complete control of the United States.

Crypto? Assuming it is legal for a public agency you could invest in stable coins. If they are reserve-backed their value is pegged to the value of a reference asset—the U.S. dollar. For those the basis for their stability is their promise to invest their assets in—you guessed it—Treasuries. Otherwise, the value of a stable coin is backed by the promise of the issuer (and the exchange?) to pay in the pegged currency. TerraUSD was one that failed in 2022 and brought down Sam Bankman-Fried.  Crypto assets that are not advertised as stable have a more tenuous link to the dollar.  I can’t begin to explain in this brief why Bitcoin is worth something over $100,000 now compared with less than $20,000 five years ago. But that fact in itself should warn off investors whose prime goal is to protect principal.

How about sovereign debt issued by other countries? Canada, for example, issues Treasury bills and it is rated Aaa. You pay for Canadian Treasury bills in Canadian dollars, and you would be repaid in the same currency. Unless you are ultimately going to spend the money you invest on Canadian goods and services— this might be the case for some spending by border states or local governments—you will have to convert U.S. to Canadian dollars twice—once to buy and once when the investment is redeemed.  Canadian Treasury bills currently yield around 2.5% and the currency has had a swing in the past year of about eight percent between its high and low vs. the U.S. dollar, so this seems not a good alternative.

Gold? It might be a haven, though its price is quite volatile. Its value is not tied to that of the U.S. dollar because you could sell it for Euros, Japanese Yen, or the Chinese Yen. If the ultimate use of the investment proceeds is to pay teachers or firefighters,  you would buy it in dollars then ultimately have to sell it for dollars. If you buy gold, the U.S. economy weakens significantly and the dollar depreciates, gold could be worth more in dollars when you sell it. Of course, the value of gold is notoriously volatile. Its value has moved in a range of about 10% in the past month and nearly 50% in the past year. Then there is the matter of how to take possession, hold and maintain your gold investment.

Bottom line.

States and localities receive all their revenue and incur all their obligations in U.S. dollars and in that sense their finances are closely tied to the value of the dollar. Not so for foreign sovereigns, businesses, and individuals. This is not investment advice but if you are Japan, or you have a retirement home in Ireland you may have other alternatives. Indeed, a big potential factor in the U.S. markets is whether foreign accounts that amass dollars because of the trade imbalance will continue to invest in Treasuries. But for public agencies, Treasuries it is because their finances are inseparable from the U.S. dollar.

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An Update: What’s Up in Texas?

The April; 16 issue of Beyond the News described bills under consideration by the Texas Legislature that would have seriously curtailed local government investment options. One proposal would have created a monopoly for the state-operated local government investment pool. A second would have required that a portion of local investments be placed with Texas banks and a third would  have made it illegal for LGIPs to pay sponsorship fees.

The legislature will adjourn June 2, and a new session will not be convened until January 2027. None of these proposals was approved or in a position to be approved, so it seems safe to assume that the open competitive investment environment that now benefits Texas localities will continue, at least for now.supranational