Previous Year Question
Consider the following statements:
Statement-I: If the United States of America were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
Which one of the following is correct in respect of the above statements?
Both Statement-I and Statement-II are correct and Statement-II explains Statement-I.
Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I.
Statement-I is correct, but Statement-II is incorrect.
Statement-I is incorrect, but Statement-II is correct.
Correct Answer: A
Detailed Solution
Statement-II is correct. US Treasury Bonds are not issued against gold reserves, land, buildings or any other specifically pledged hard asset. They are sovereign debt securities backed by the full faith and credit of the United States Government.
“Full faith and credit” means that investors rely on the US Government’s power to levy taxes, raise revenue, borrow funds and honour its debt obligations.
The principal features of Treasury Bonds are:
They are normally issued with maturities of 20 or 30 years.
They carry a fixed interest rate.
Interest is paid every six months.
The principal amount is payable at maturity.
They are not collateralised by any specific government asset.
Statement-I is treated as correct in the context of the UPSC question. If the US Government defaults, bondholders cannot sell or seize a specifically pledged asset to recover their payment because no such collateral supports Treasury Bonds.
A default does not legally extinguish the Government’s debt obligation. The investor’s contractual claim continues to exist, but the investor cannot act like a secured corporate creditor and seize a particular government asset to satisfy the claim. Payment would ultimately depend on the Government making the necessary fiscal and legislative arrangements.
Statement-II, therefore, explains why Treasury Bond holders would not possess an enforceable claim against specific hard assets in the event of default.
Possible economic consequences of a default
US Treasury securities are treated as highly secure and liquid assets in the global financial system. An actual default could therefore:
Reduce Treasury-security prices and increase their yields;
Raise the US Government’s borrowing cost;
Affect the balance sheets of banks, pension funds and money-market funds;
Increase volatility in the US dollar and global financial markets;
Adversely affect the sovereign credit rating of the United States.
Current status (2026)
US Treasury Bonds continue to be issued for terms of 20 and 30 years and pay interest every six months. US federal debt is not secured by specified gold or physical assets; it continues to rest on the full faith and credit of the US Government.