What the Bond Market Is Telling Us
April 22 2010 by ChiefExecutive.net
SUPPOSE THE U.S. TREASURY HELD AN AUCTION AND NO ONE CAME?It hasn’t quite come to that but investors are indicating that demand for long-termbonds is sputtering and yields are surging to compensate, suggesting that the President’s near-unprecedented borrowing, raising the national debt toWorldWar II levels, is having troubling consequences. In recent weeks the bond market has been saying that it is safer to lend toWarren Buffett than it is to Barack Obama. According to Bloomberg News reports, bonds sold by companies like Berkshire Hathaway have returned 3.24 percent this year including reinvested interest, compared with a 1.55 percent gain for Treasuries. Last year, returns exceeded government debt by a record 23 percentage points. In recent weeks Procter & Gamble, Johnson&Johnson, Abbott Laboratories, Lowes and Royal Bank ofCanada debt also traded at lower yields than Treasuries. The reason is that federal public debt is nearing $9 trillion and is projected to reachmore than $10 trillion by next year.Moody’s Investors Service predicts the U.S. hasmoved “substantially” closer to losing its AAA rating and reckons that theU.S. will spendmore on debt service as a percentage of revenue this year than any other toprated country except the U.K.
By jamming the health care bill through Congress, the Democrats have jeopardized the status of the U.S. as the world’s safest investment. Theymay point to the Congressional Budget Office’s report that the bill would reduce deficits over 10 years. But bond buyers know better. They know that our solons inWashington gamed the systemto get a better score. The bill will not lower deficits as former CBO director Douglas Holtz-Eakin told The New York Times, but will raise them by $562 billion over the next decade. Even current CBO forecasts predict that publicly held debt will zoomfromlast year’s $7.5 trillion to $20.3 trillion, or 90 percent ofGDP by 2020. The government will have to borrow that money and likely pay higher interest rates than it’s paying now.
We are approaching a debt-to-GDP ratio thatmay soon correlate to sovereign default as investors likeChina begin to wonder whether the U.S. is good for the money.