Borrowing Becomes More Expensive for Obama than Buffett?

By Daniel Indiviglio

Bloomberg has an article today with one of those fabulous headlines guaranteed to garner lots of clicks: "Obama Pays More Than Buffett as U.S. Risks AAA Rating." So naturally, I nearly replicated it here. As it turns out, U.S. debt is becoming pricier to issue than that of some AAA-rated companies, billionaire investor Warren Buffet's Berkshire Hathaway included. Is the bond market correct or crazy to require more yield for U.S. debt?

Here's a blurb from the article:

Two-year notes sold by the billionaire's Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe's Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an "exceedingly rare" event in the history of the bond market.

What sticks out to me there is the term of the notes: two years. So essentially, these investors are betting that there's a higher likelihood that the U.S. will default on its debt in the next two years than Berkshire, P&G, J&J and Lowe's. Oh c'mon! Is there any chance of the U.S. defaulting so soon?

I doubt it, very highly. Even if you think that the U.S. government is on an unsustainable spending path (and I do), it's pretty extreme to think that the nation will actually default on its debt. And it's even crazier to think that will happen in the next two years. Private firms, on the other hand, could more likely experience some sudden shock leading to their bankruptcy in the short-term. 

When it comes to longer-term U.S. debt, I could, however, kind of understand if investors began to demand a higher yield. There's a significantly greater likelihood, for example, that the U.S. could default 10 or 20 years down the road. Unless the government gets serious about deficit reduction and paying down some of its borrowing over the next decade, we'll be in serious trouble. So if you think Washington is too dysfunctional to manage its spending, then you may think that default could one day happen. But in the next two years, I just don't see it.

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This article available online at:

http://www.theatlantic.com/business/archive/2010/03/borrowing-becomes-more-expensive-for-obama-than-buffett/37838/