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If US government defaults on bonds, is Permanent Fund at risk?

Pat Forgey

JUNEAU -- Alaska has nearly $100 billion invested in markets around the world, including billions of dollars in short-term investments such as U.S. Treasurys.

But there may be little or nothing that Alaska can or should do to try and protect against potential risks if the federal government defaults on those Treasurys by failing to raise the debt ceiling, said Gary Bader, chief investment officer for the Alaska Department of Revenue's Treasury Division.

"I guess I just have more confidence that the right thing will get done and the government will not renege on its promises," he said. "They may have some difficulty paying them in the short term, but they will get paid."

The department oversees about $50 billion as of the end of September, with the largest single part of that being retirement trust funds. It has $6 billion in short-term bonds, $9 billion in intermediate-term bonds, and several billion more in related bond funds.

The Alaska Permanent Fund holds an additional $47 billion in total investments. As of Aug. 31 it had $9 billion in various bond holdings.

Some top national investors have been making financial moves in anticipation of a default, but it is not clear what that might mean for Alaska. Earlier this week, mutual fund giant Fidelity Investments announced that it was protecting itself by selling its short-term Treasurys, while bond powerhouse PIMCO announced it was buying short-term Treasurys, hoping to profit.

Bader said the Treasury Division investment officers could see there was selling going on in the Treasury market, driving prices down, but until Fidelity's announcement they didn't know who was doing it.

"We knew that there were people trying to get away from short-term Treasurys because we saw it reflected in the prices," he said.

Alaska doesn't want to sell at a time when prices are being driven down by selling, he said.

At the same time, it could be risky to do as PIMCO is doing, and try to profit from the volatility, he said.

"We are investing the way we normally have," he said.

Fidelity has a money market fund that is priced daily that needs to remain stable, while Alaska doesn't have that burden, he said. It's also got plenty of cash to meet short-term needs.

"I just don't think we are in a position to try to time or predict what is gong to happen in Washington," he said.  "We're not Fidelity or PIMCO."

A bigger threat that’s more difficult to prepare for is the broader effects of a possible default, he said.

"If they choose to not make payments on debt, on the national debt, that could have a very disruptive effect on international markets," Bader said.

There is little beyond what Alaska is already doing with a broadly based investment portfolio to prepare for that, he said.

"It's important to take a longer view," he said "We've had these sorts of scuffles before and we've survived it. There may be some rough water, but we're going to survive it."

Permanent Fund Corp. Executive Director Mike Burns declined comment about what risks the fund's portfolio might face, calling such questions "speculative," said Laura Achee, the corporation's spokesperson.

Contact Pat Forgey at pat(at)alaskadispatch.com