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If the debt ceiling isn't raised, will my savings bonds be worthless?

July 29, 2011: 9:00 AM ET

If the debt ceiling isn't raised, will Series EE savings bonds be worthless? — Janet Stevens, El Paso

No, they won't. Certainly, one can understand why you're concerned: The ongoing battle over raising the debt ceiling, which would prevent the U.S. Treasury from issuing new debt, raises the question of whether the government would pay off its current obligations. Those obligations include not only interest on debt that's already been issued — everything from 30-year Treasuries to Series EE bonds — but also many other payments the government is expected to make, ranging from Medicare payments to paychecks for federal government employees. If in fact the debt ceiling isn't raised, government spending would have to be cut back as much as 44% in August, according to a report issued Thursday by the Bipartisan Policy Center.

So what is the likelihood of your bonds turning worthless? Pretty close to zero. Yes, if the ceiling isn't raised by August 2 — the date after which the Treasury says it won't be able to meet its obligations without further borrowing — the US government would have to make some pretty tough choices about who gets paid what, and how soon. And yes, the possibility is growing that Washington will miss that deadline by at least a few days.

But even if the government can't borrow momentarily, you're still in good shape. For starters, it appears that bondholders will get priority when the nation's bills get paid, according to a Thursday report from Bloomberg. Furthermore, if the government were to walk away from its debts, paying zero cents on the dollar on both the principal and the interest it owes you and other bondholders, it would set off an economic disaster equivalent to detonating a nuclear bomb. Politicians may have had violent disagreements with one another in recent weeks, but it doesn't make sense that Washington would be that self-destructive.

If that doesn't reassure you, consider the answer to this question: How worried about U.S. government default are the investors who have a lot more money at stake than you do — along with more time and money to research the safety of their holdings?

The answer:  Not much. "We're not seeing any massive selloffs," says Marilyn Cohen, founder of bond investing firm Envision Capital Management and author of the newly published book Surviving the Bond Bear Market. "That tells you that foreigners aren't liquidating and the big money isn't liquidating. I'm not saying all is well, but it's not a catastrophe."

Cohen points out that Series EE bonds are no lower on the pecking order of being paid than are Treasury bonds, bills and notes — so you'd be in the same boat as large-scale investors. Rather than suspend payments on Treasury debt, she believes the government would make cutbacks elsewhere."I think we've elected bozos in the Senate and the House but I don't think they're going to send us over the brink," says Cohen.

— George Mannes

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