Companies Preparing for ‘Unthinkable’ U.S. Downgrade, Default

July 28 (Bloomberg) -- Corporate treasurers are preparing for a downgrade of and potential default on U.S. Treasuries by shortening the average maturity of their holdings and moving more money into insured bank accounts and money-market mutual funds.

While companies aren’t selling Treasuries, they are reinvesting cash from maturing securities in the shortest available instruments, consulting firm Treasury Strategies Inc. said in an e-mailed statement today, citing discussions with clients.

“Corporate treasurers are preparing for the unthinkable,” Anthony Carfang, a partner in the Chicago-based firm, said in the statement.

Treasury Secretary Timothy F. Geithner has repeatedly said the government’s authority to borrow will run out on Aug. 2 unless Congress raises the debt ceiling. Republicans and Democrats have been unable to agree on an increase in the debt cap or budget cuts, leading to concerns that the U.S. will lose its AAA credit rating.

Companies consider a downgrade “highly likely” and believe a default on bond payments “a much lower probability,” Treasury Strategies said.

The firm said companies may be discouraged or prevented from piling into insured deposits by banks.

“Treasury Strategies believes some banks may begin capping the deposits they accept from a customer and paying a negative interest rate above the cap,” the company said. “A negative rate of as much as 0.30 percent is still less expensive than buying a Treasury bill and protecting it with a credit-default swap.”

Credit-default swaps pay the buyer face value, less the value of the defaulted debt, if a borrower fails to meet its obligations.

Money-market funds, while they also own Treasuries, can be safer than direct ownership of Treasuries because the holdings are more diversified, the company said.

--With assistance from Peter Cook and Cheyenne Hopkins in Washington. Editors: Steven Crabill, Christian Baumgaertel

To contact the reporter on this story: Christopher Condon in Boston at [email protected]

To contact the editor responsible for this story: Christian Baumgaertel at [email protected]