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It's the moment bond vigilantes have been waiting for.

Three times this week, the U.S. government was forced to pay sharply higher rates on tens of billions worth of Treasuries to entice buyers - an ominous sign that global investors may be losing faith in the United States' ability to manage its swelling debt load.

If it keeps up, the trend could lead to higher interest rates on everything from home mortgages and car loans to other forms of credit.

It would also make it costlier for the U.S. government to finance its massive borrowing.


"What's happening in Greece and Dubai is headed our way, eventually," argued Eric Roseman, president of Montreal-based ENR Asset Management.

"No nation, not even a reserve currency, can continue to fund deficits externally in the absence of domestic savings and no plan to reduce deficit spending."

The yield on 10-year U.S. Treasuries is now just shy of 4 per cent - its highest level this year and roughly where it was at the peak of the 2008 credit crisis. Yields are up 25 basis points in the past week alone.

Economists warn that higher interest rates could cut off credit to business and homeowners, and short-circuit the fragile U.S. recovery.

There are several reasons for investor angst - tensions with China, the rapidly rising U.S. debt burden, a possible sovereign debt virus, and the imminent end of the U.S. Federal Reserve's mortgage debt purchase program.

A pending decision by the Obama administration on whether to label China a currency manipulator could set off a destructive U.S.-China trade war and prompt the Chinese to dump their vast holdings of Treasuries.

As well, many investors simply don't believe U.S. President Barack Obama's assurances that the new health care reform law will lower the deficit.

And finally, the concern about sovereign debt is on the rise, not only in Europe, as leading industrialized countries run up large deficits to kick-start their economies.

"High fiscal deficits and higher outstanding debt lead to higher real interest rates and ultimately higher inflation - both trends which are bond market unfriendly," Bill Gross, managing director of Pacific Investment Management Co., a leading bond fund manager, remarked in a commentary posted on the company's website.

Mr. Gross said there are good reasons to be wary of the U.S. fiscal situation. The country is expected to run budget deficits of near record 10 per cent of gross domestic product, piling on to its long-term debt. And even before the health care legislation, Congress still hadn't figured out how to finance the big entitlements due to Americans, including Medicare and Social Security.

"The trend promises to get worse, not better," Mr. Gross said. "Health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities."

Not everyone shares the dire warnings about U.S. Treasuries. Analysts point to technical reasons why demand was so weak, especially among foreigners. And they say yields could just as easily head lower again in the coming weeks.

A recent runup in the value of the U.S. dollar versus the euro and other major currencies makes Treasuries more expensive for foreigners.

Paul Dales, an economist at Capital Economics in Toronto, suggested the weak demand was due to "technical factors," including investor preference for off-balance-sheet derivatives over on-balance-sheet bonds in the final days of the first quarter.

U.S. bond yields are likely to head lower from current levels, not higher, he argued. "Concerns over excessive supply, foreign demand and sovereign credit risk will not lead to a full-blown bond market bloodbath," Mr. Dales said.

"It won't be long before [those fears]are overwhelmed by the downward pressure on yields from a fading of the economic recovery and fall in inflation to some very low levels."

And every basis point is critical: The United States is expected to issue $1.6-trillion (U.S.) worth of debt this year.