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I am looking into the constructing of my own sort of "structured product" and have been thinking about the risk profiles of the "risk-free" portion of products like this.

Generally, U.S. treasuries are considered to be the closest thing to a risk-free asset (and may still be), but in the current climate where a potential U.S. default is more at the forefront (this question is not about "if" a default will occur), I want to know:

Is there a benefit to trying to construct a "more" risk-free asset/basket of assets such as currency-hedged ultra short-term (~4 weeks) sovereign debt (or other "risk-free" assets? open to ideas) from a collection of financially-stable governments as opposed to only the U.S.? or is any reduction in credit risk made up for (and potentially more) by an increase in risk due to any of the other moving parts involved? (method of currency-hedging, other introduced systematic risks, implementation risks, etc) and would this be feasible/worth it for a non-institutional investor/trader?

I think that this question deals at least a bit with what I'm addressing, but addresses more of the etf/bond price movement side of things which I think differs from mine due to the difference(?) between bonds and bond etfs with regards to repayment of initial investment as well as the focus(?) on bonds versus "risk-free" assets in general.

Thanks!

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    Be aware that "risk-free" / "low-risk" only applies if you hold bonds until maturity. If you value them by their current sale price, the value fluctuates inversely with interest rates. May 22, 2023 at 14:15
  • @MartinBonnersupportsMonica that's why I've transitioned to actually buying bonds.
    – RonJohn
    May 22, 2023 at 14:22

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Is it worth it ...

That all and only depends on how likely you think it is that the feds will default on their loan payments.

If you really think it's likely, and you have so much money in US gov't bonds that you think the time, effort and expense of taking out hedges is worth it, then it's incumbent upon you to do so.

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  • Fair point, I guess taking the "worth it" portion out of the equation, should U.S. Treasuries still be considered the "risk-free" asset in financial markets (excluding explicitly holding cash since it doesn't generate a return) in the presence of these potential events (however unlikely)? Or is there some other feasible standard to go by for a "risk-free" asset that would be more "correct" in the current climate? Apologies if this is better suited to asking as a new question.
    – QMath
    May 22, 2023 at 6:16
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    @QMath cash (literal dead presidents) under your mattress are at risk of theft and fire. Bury them in the yard and they rot, even when wrapped in plastic.
    – RonJohn
    May 22, 2023 at 7:19
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    @QMath there's always some risk. If, for example, China convinces OPEC to stop using the USD as the default trading currency, then we'll be in a world of hurt, given the Federal debt.
    – RonJohn
    May 22, 2023 at 7:22
  • Again, very valid points, haha, I know the term "risk-free" taken literally is usually a simplifying assumption in finance, but is it feasible to try to determine what asset is the closest to "risk-free" (as in, something with the lowest risk relative to all other assets) or does this in a way amount to trying to "model everything"? meaning that we should just pick something that's generally renowned as extremely low-risk and go from there.
    – QMath
    May 22, 2023 at 9:51
  • @QMath is it feasible? You can give it a shot... Possible answers are real estate, precious metals and canned goods (though they're more a hedge against hyperinflation) and Eurobonds (though they have their own risk, including forex and currency controls).
    – RonJohn
    May 22, 2023 at 12:57

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