Your Money: A debt deal is coming, but then what?

The U.S. government will raise the debt ceiling - you heard it here first. But as a result, Treasurys should face a downgrade from their sterling "Triple A" rating.

That affects you, me, and any investors holding government bonds in their portfolios. But how?

Think about the federal government as a debt-ridden American consumer, with a ton of credit-card debt. Not only is the consumer borrowed to the hilt - and borrowing to pay interest - but he continues to go back to Congress for a higher credit limit.

If Congress and the White House agree, the government's $14.3 trillion debt limit will go higher by selling more Treasury bonds. Naturally, important folks like Federal Reserve Chairman Ben Bernanke argue the U.S. government must be allowed to get this higher credit limit, warning that a failure to do so would prompt a "major crisis" and send "shock waves" through the financial system.

Maybe so, but the market will do what the White House and Congress won't. A savvy lender won't keep giving the United States, that overspending credit-card-holder, more money. The United States' main lenders are China, foreign buyers of Treasurys, mutual funds, or retail investors buying U.S. government bonds.

A ratings downgrade could actually be very healthy for the Treasury market - and good for investors in the very long term. Here's why:

The U.S. government has been paying an artificially low interest rate on Treasurys for years (10-year Treasurys currently pay a puny 2.90 return). Now that the reality of America's fiscal problems has been recognized, long-term investors in Treasurys should start getting paid more for the risk of owning U.S. debt.

A compromise that raises the debt ceiling before Aug. 2 doesn't ensure that U.S. sovereign debt won't be downgraded. And the short-term fix that the emergency legislation would provide will still leave investors unsettled.

When the debt ceiling is raised - and it will be, because neither Democrats nor Republicans can risk not doing so - the United States won't technically default. Short term, that's good.

However, raising the debt ceiling does not solve the basic problem, and a downgrade (think of it as a lower credit score) is inevitable.