As the President and the House of Representatives hold dueling pressconferences to blame each other for the current impasse on the US budget and debt limit, large foreign investors have been watching uncomfortably. Last week the FT reported that several prominent Chinese academics and senior government officials are not happy about this brinkmanship, which is providing new impetus for further diversification of reserves away from US Treasuries and Agencies. Since the financial crisis, China has diversified its foreign asset holdings away from the dollar (today US$ assets make up 49% of its total foreign assets), but the proportion of its remaining dollar assets has been increasingly invested in Treasuries (from 62% in 2009 to 72% today). It’s not just the Chinese government expressing concern; in early October Japanese investors sold some $22.8 billion worth of foreign debt (primarily US Treasuries). Though US Federal budget standoffs are usually good for US Treasury prices in the short term, our political dysfunction appears to have reached the point where it is eroding confidence in our government globally. This is impacting our credibility and potentially the long-term global demand for our debt. It is important as debt investors to remember that credit quality is comprised not only of ability, but also willingness, to pay, and these games of chicken in Washington have a serious negative impact on the worldwide perception of the latter.