Who buys U.S. debt in the case of a default? The simple answer is no one. However, that almost certainly is untrue. There is always someone, or some group, who has the guts of a riverboat gambler and is willing to take extraordinary risks for extraordinary returns, even if the alternative is brutal.

The financial firms with the largest appetites for risk are hedge funds, those investment companies that are willing to go long and short at the same time. Many of these have bet on the prices of gold, currencies and sovereign debt of European nations. U.S. debt would, as a gamble, seem to be better than these. Its value might only drop for a few days, and then spring back in the event of a debt ceiling settlement.

Perhaps the least likely buyer of U.S. debt is China. The People’s Republic owns nearly $1.3 trillion in U.S. paper. It has the choice of watching the value of those assets plunge or stepping into the market to give the debt at least brief support. China may reason, although it is a long shot, that a default may be short lived and that its sovereign fund might make money through supportive buying. China recently warned the United States about its responsibilities. The Guardian reported:

Zhu Guangyao, the vice-finance minister, said “The United States is totally clear about China’s concerns about the fiscal cliff. We ask that the United States earnestly takes steps to resolve in a timely way before 17 October the political [issues] around the debt ceiling and prevent a US debt default to ensure safety of Chinese investments in the United States and the global economic recovery. This is the United States’ responsibility.”

Behind that warning, China may protect its own interests.

Could the Federal Reserve buy U.S. debt in the event of a default? Probably not legally. But extraordinary times require extraordinary actions. Ben Bernanke’s departing gift to the country could be a buying program. The Fed does not have the financial power to buy enough to matter, in the long term. The symbolic power of such an action, though, could bring other buyers into the market.

If it is true, and it has to be, that for every seller there is a buyer, at some point U.S. sovereign paper will find a level of support, either because of those who want to take on risk or those who may have to.

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