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U.S. default would send bond markets reeling

NEW YORK — It's no surprise that investors get nervous every time politicians debate raising the U.S. debt limit.

But the $38 trillion bond market is a far larger and more important driver of world financial markets than U.S. stock markets.

And at the center are U.S. Treasurys, which allow the U.S. to borrow cheaply to pay its bills and influence rates on home mortgages and many other kinds of loans.

What are U.S. Treasurys and why do investors care about them?

Treasurys are debt issued by the U.S. government.

The federal government has consistently run a budget deficit for decades, so the U.S. borrows billions of dollars from investors to pay its bills. The United States is the largest debtor in the world, owing roughly $12 trillion to public investors.

Investors buy Treasurys for various reasons, but the main reason is safety, as the U.S. government has never intentionally failed to pay its debts. Because the U.S. government owes so much and because investors expect the U.S. government to honor its debts always, the Treasury market is considered the cornerstone of the global financial system.

What's been going on with U.S. Treasurys since the debt ceiling debate turned nasty?

Investors have been selling Treasurys that come due around the time the U.S. government hits the debt ceiling, Thursday. The fear is that if the U.S. government is unable to borrow and runs out of cash, it might fail to pay back the money if owes, at least temporarily. Investors fear they might get stuck holding these T-bills and when they come due, the U.S. government won't have the cash to pay them back.

If the U.S. were to default, how could it affect me?

Financial markets would sink. Social Security checks would be delayed. Eventually, the economy would almost surely slip into another financial crisis and recession.

A default could also translate into higher borrowing costs for consumers, on everything from auto to home loans, as investors would consider U.S. debt a riskier investment and demand more compensation. That could lift interest rates on loans that are tied to U.S. Treasurys — basically everything. It would make borrowing for the U.S. government more expensive, and cost us more as taxpayers.

There's also a strong possibility that a U.S. default may impact bank-to-bank lending. If bank lending rates go up, and if banks have to offer more collateral to borrow, it could slow lending and hurt economic growth.

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