3 Strategies to Capitalize on a Potential Government Debt Default

In its long history, the United States has never defaulted on its debt. However, as the debt continues to rise, there are concerns about whether the government will be able to meet its obligations in the future. While a U.S. government default is considered unlikely, it’s important to explore potential strategies in case such an event occurs. Here are three approaches to consider:

1. Short bond ETFs: If a default were to happen, yields on bonds would surge, causing the prices of existing bonds to decline. To mitigate risk, investors can use bond ETFs, which offer diversified exposure to a portfolio of bonds. For instance, the 20+ Year Treasury Bond iShares ETF (TLT) could be considered. If yields increase significantly, the premium on current holdings in TLT would decrease, as investors may prefer higher-yielding bonds.
2. Short the Dollar: A loss of faith in the U.S. government could lead to a decline in the value of the U.S. dollar, as investors seek alternative safe-haven assets. Currency traders may consider shorting the dollar and buying another currency that appears more promising. For average investors, ETFs can provide exposure to currency movements. One option is to short the Invesco DB US Dollar Index Bullish Fund (UUP), which has high daily trading volume. Alternatively, going long on the Invesco DB US Dollar Index Bearish Fund (UDN) is an option, although it has lower daily trading volume.
3. Short the Equity Markets: If yields rise due to a potential default, the cost of capital will increase, which could slow down business expansion and negatively impact the equity markets. Investors can consider shorting bullish equity ETFs tied to major indexes. For example, shorting the 1x long S&P 500 ETF (SPY), the 2x long S&P 500 ETF (SSO), or the 3x long S&P 500 ETF (UPRO) may be viable options. On the bearish side, investors can explore the 1x short S&P 500 ETF (SH), the 2x short S&P 500 ETF (SDS), or the 3x short S&P 500 ETF (SPXU).

It’s important to note that the likelihood of a U.S. government default is considered low, and the strategies outlined above involve significant risks. The most probable outcome is a temporary closure of government agencies and a subsequent raising of the debt ceiling. However, in the event that a default becomes a real possibility, these strategies may present opportunities. Nonetheless, it’s crucial to recognize the elevated risk associated with such unprecedented circumstances, as markets typically dislike uncertainty.