Alan Pentz, a government consultant in Washington, D.C., thinks that federal contractors will try to protect themselves in the future. He sees many setting aside larger reserves.

"Long term, people are going to be more conservative and hold back funds," he said, noting that this is money that would otherwise be invested or used for productive purposes.

Some economists and investors on Wall Street worry the latest default threat could lead to higher borrowing costs — not just for the U.S. government but also for consumers.

U.S. Treasury bonds are the bedrock of the global financial system; for decades investors have had no reason to doubt T-bills' status as something as good as cash. Now some question whether their interest rate, or yield, would remain synonymous with no risk.

"Is there a risk-free rate? I don't know," said Joe Lynagh, a portfolio manager overseeing money market and cash investments at T. Rowe Price.

The U.S. already is paying a price for nearly breaching the debt ceiling. Yields on four-week T-bill rates jumped as President Obama and Congress battled over raising the debt ceiling this week. By Tuesday, rates on these bonds jumped to 0.34% — a huge leap from 0.02% in late September.

Although yields have since retreated, the spike took its toll. The U.S. will have to pay $114 million in additional interest, according to an estimate by IHS Global Insight.

"Even with the deal to avoid a default, the damage has been done by the fact that we have had a debate questioning whether the U.S. will pay its bills," Larry Fink, chairman and chief executive of investment giant BlackRock Inc., told analysts Wednesday.

Although few average investors pay attention to this corner of the bond market, short-term T-bills play a crucial role in greasing the wheels of finance. Interest rates paid by the federal government bleed into rates consumers pay to borrow to buy cars and homes.

"There's costs here for everybody," said Lynagh at T. Rowe Price.

Another concern is that the latest episode may accelerate a long-term trend away from Treasury bonds and the U.S. dollar as the world's primary reserve currency. Central banks from around the world may stock up on other safe investments, such as bonds issued by the Eurozone or Japan.

For now, the United States' luster — while tarnished — still outshines that of all other countries. Investors have relatively few alternatives. But the latest ordeal may have further chipped away at America's reputation. And the risk has increased that investors may demand that the U.S. pay higher interest because of new default risks.

On Thursday, the Chinese credit rating agency, Dagong Global Credit Rating Co., downgraded U.S. debt to A- from A, saying that "the government is still approaching the verge of a default crisis, a situation that cannot be substantially alleviated in the foreseeable future."

Major American credit rating agencies did not follow suit, and international investors were not likely to take the obscure Chinese agency's move seriously. Nonetheless, analysts said such actions and comments certainly won't help America's standing or influence in the global arena.

"There are countries that would like to believe the Chinese line," said Morici, the Maryland professor.

don.lee@latimes.com

Jim.puzzanghera@latimes.com

 

andrew.tangel@latimes.com

Tangel reported from New York.com