Here we go again: fixed-income investors are flocking to quality, and apparently they’ve found it in U.S. government bonds.
If you find that pretty ironic, that makes two of us. U.S. federal debt is now just over 100 per cent of gross domestic product, and the total value outstanding is $15.7-trillion. And yet somehow that’s the safest bet for the world’s biggest pension funds and big name portfolio managers.
Obviously the picture isn’t so clear cut. Everything in finance is relative, and investors simply believe the U.S. is better off than other economic powerhouses like the euro zone and Japan.
They’ve actually got a legitimate reason to think that. As The Economist pointed out today, credit is now tighter in the euro zone than it was at the peak of the financial crisis (though, I suppose depending on where you are in the world, the peak is relative.) The Economist put together a euro zone credit crunch index, with a value of 100 equating to maximum distress and today the region is hovering around 70, just a smidgeon higher than the 68 at the start of 2009.
For largely that reason, it isn’t just 10-year Treasury yields that are plummeting. U.S. 5-year government bonds have also reached a new low of 0.6967 per cent, lower than the 0.7045 per cent they hit in early February, and 30-year Treasuries have also dropped to 2.72 per cent – though the low for these bonds was around 2.5 per cent in December 2008.
Just citing the yields can get pretty repetitive, so consider this language: the U.S. federal government can now borrow a wad of cash for just 1.63 per cent a year. Imagine you could get a mortgage at that level. You’d be out buying every house in sight.
It’s also worth nothing that we’re taking our word with The Economist on 60-year lows because Bloomberg data only goes back so far (most people are citing the new rates as all-time lows.)
The big question now is how long these rock-bottom low rates will last. No doubt, credit is tight in the euro zone, but some well-respected people have voiced their concerns that the fears about Europe are overblown. Jacob Kirkegaard, a research fellow with the respected Peterson Institute, has some controversial theories.
For starters, he believes it is actually better that the market has now accepted the true financial state of Bankia, the Spanish bank that was bailed out, because the end of denial is always a positive. He also believes that the market is putting too much emphasis on Bankia itself. “Better wait until the independent auditors publish their report [on all of the banks] before passing judgment on Spain’s true fiscal state,” he notes.
But maybe most importantly, he argues, Germany has suggested its support for a “grand coalition” agreement that would essentially create “joint liability debt.” Germany has tried to keep its finances separate from the struggling countries for so long, and now it appears to be willing to share some of the hurt. That support would go a long way.