Skip to main content
Welcome to
super saver spring
offer ends april 20
save over $140
Sale ends in
$0.99
per week for 24 weeks
Welcome to
super saver spring
$0.99
per week for 24 weeks
save over $140
// //

A section of the giant euro banner, featuring an image of a euro coin and promoting stronger European economic governance, hangs on the side of the headquarters of the European Union commission at the Berlaymont Building, in Brussels, Belgium on Nov. 21, 2011.

Jock Fistick/Bloomberg

Record low interest rates and record high debt levels are a marriage that history tells us won't last long.

This is a lesson European bondholders have already learned. And it is one that will likely unfold in the U.S. Treasuries market, the supposed haven from the panic gripping European bond markets these days.

In Europe, holders of sovereign debt have already seen how soaring debt levels crush bond prices. Bond yields soared to over 20 per cent on Greek debt as bond holders were compelled to take a voluntary 50 per cent haircut on the face value of their bonds.

Story continues below advertisement



While technically not a default, the 50 per cent markdown of the value of Greek bonds is no different than a default for the country's short-changed creditors. Even worse, since the markdown on the value of the bonds was voluntary, credit default swaps bondholders bought to insure against the risk of default offered no protection at all.

Looking at what happened to Greek bonds, it is not difficult for global fixed income markets to worry that Italian or Spanish bondholders will be soon asked to take similar voluntary haircuts. Both countries' bond yields are approaching the 7 per cent threshold that saw Portugal, Greece and Ireland exit the bond market and turn in desperation to their euro zone partners for bailouts.

While Italy's deficit is modest-sized, its debt is huge. It is the largest in the euro zone, measuring in excess of the country's gross domestic product. Should it or Spain require the same kind of assistance as Greece, Portugal and Ireland have already received, markets fear the Reichstag will once again demand a pound of flesh from bondholders in exchange for further financial assistance from German taxpayers.

That may well explain the flight of capital from European bond markets, but it hardly justifies where the money has been fleeing. The flow of capital pouring into the U.S. Treasuries market pushed 10-year yields recently below 2 per cent.

But the debt-laden U.S. Treasuries market is an unlikely sanctuary from Europe's fiscal problems. The U.S. federal debt-to-GDP ratio has almost doubled to 74 per cent over the past couple of years.

And America's debt ratio is only going higher in the near-term. With the so-called super committee in Washington striking out on a last minute bipartisan effort on a deal on future budget cuts, it is safe to say that America's huge budget deficit isn't going to be getting any smaller until after next year's presidential elections. By that time, Washington will have just run up another trillion dollars or so of debt. That's hardly a sanctuary from default risk.





Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies