U.S. Treasury securities have long been regarded as the best proxy for a theoretical risk-free asset. Their payments are backed by Congress's unique power to tax an economy that accounts for a quarter of the world's entire economic output. But this risk-free reputation is now in question; as U.S. gross debt approaches 98 percent of GDP the phrases "U.S. default" and "price inflation" have become pervasive in the media.

How then, is the U.S. government still able to borrow at historically low interest rates? Ten year Treasuries are currently yielding only 3.1 percent. Treasury bond prices (and yields), like those of any capital asset, are affected by news of all kinds. But when Treasuries' greatest selling point, their creditworthiness, is in question, it is hard to divine any offsetting "good" news that would explain a rate of return suggesting such low risk.

Perhaps this is because investors live in a world of alternatives and many other sovereign lenders are in similar straits. Despite its fiscal woes, the U.S. is still regarded, apparently, as "the world's tallest dwarf" among issuers of fiat-backed debt.

There are signs this could be changing. The price of credit default swaps (CDS) for short-term U.S. Treasuries tripled over the six days ending May 25 as political rhetoric grew heated regarding an increase in the government's $14.3 trillion debt limit. CDS insure against lender default.

We do not weigh in on politics, other than to assess matters in terms of the incentives faced by politicians. Republicans will allow an increase in the limit only if meaningful spending reforms are adopted; they hope to appeal to a growing sense of anxiety among voters regarding government debt. Democrats are banking on an aging electorate fearful of spending changes, particularly those that might threaten entitlements.

If the debt limit is not increased, it is unclear how the bond markets will respond. Renowned bond investor Peter Druckenmiller has argued persuasively that exceeding the debt limit (technical default) might be tolerable to bondholders. By his reasoning, creditors would accept the resulting delay in interest payments today, because it would encourage genuine reforms that would ensure they would receive payments in the future.

While Mr. Druckenmiller may be an astute judge of how bondholders would react, his assessment of the political reaction is more tenuous. James Mackintosh of the Financial Times asserts that delayed interest payments would provide little incentive for Democrats to capitulate, and that continued delays could easily drag on and end in financial disaster.

As empiricists we rely on the past as our guide to the future; unfortunately history is of little help in assessing this fiscal situation. While we are unsure of the outcome, we are quite certain that our longstanding commitment to gold as part of a well-diversified portfolio has proven valuable to investors, and will continue to be of benefit in the future.

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