Wall Street thinks the Tea Party is bluffing. Analysts in New York think the chance House Republicans will blow the August 2 deadline to raise the debt ceiling is minuscule, so bond traders aren't dumping U.S. bonds. But even if they thought a default was coming, Wall Street is not exactly sure how they should prepare. The U.S. has never defaulted on it's debt; Treasury bonds are used like currency.
In New York, the hedge fund KLS Diversified Asset Management has been accumulating cash to take advantage of profit-making opportunities if, for instance, investors are forced to sell cheaply because of a decline in the nation's credit rating. ... In the case of a United States default, KLS says it believes it can make money if investors flee the market...Several weeks ago, [Deborah Cunningham of Federated Investors] put plans in place to deal with a default. The firm will convene a teleconference with the boards of affected funds, she said, and, she is considering arguing for holding onto the federal debt. "We have to justify to the board why we would want to continue to hold them, which might be because they are a high-quality, minimum-risk security," Ms. Cunningham said.
Timothy J. Sloan, Wells Fargo's chief financial officer, said that if Congress could not reach a deal or if there was a spike in interest rates, his bank would be there to handle the situation. But in terms of specifics, he said, there was not much banks could do. "Because nobody knows what is going to happen, nobody knows how to prepare," he said.