Wall Street isn't waiting for Washington lawmakers to resolve their differences over the debt ceiling in time to avoid a U.S. default on its debts on August 2.  Wall Street firms have started putting together "doomsday plans," which would include reducing the risk of holding Treasury bonds.

• hedge funds, like Moore Capital, Soros Fund Management KLS Diversified Asset Management have been moving their top funds into cash, which would enable them to buy debt as other investors get out - i.e., selling cheap after the eventual decline in the nation's credit rating.

• mutual funds are "working on presentations to persuade their boards [to allow them to] hold the bonds even if the government debt is downgraded."  The instruments that pay if the U.S. defaults have doubled in price since the start of this year.

A downgrade of the U.S. credit rating is worrisome because some investors - e.g., mutual funds - have rules restricting them from holding assets that are not AAA-rated.  Such rules could force a massive selloff of Treasuries. 

However, Federated Investors' Deborah Cunningham said the funds themselves wouldn't necessarily have to dump Treasuries because SEC regulations only require that funds invest in Treasuries, without regard as to whether Treasuries are AAA rated.    [NYTimes, 7/20/11]