If Our Debt Is So Dangerous, Why Are People Begging for More?
In 2011, bond buyers fought tooth and nail to get their hands on U.S. government debt.
This morning, Bloomberg reported that investors' demand for Treasury bonds was the highest it's been since 1995. For taxpayers, the timing could not be better. The more banks, pension funds, and foreign countries clamor for Treasuries, the lower the interest rate our government has to pay. So in this age of gargantuan budget deficits, we're getting dirt-cheap loans to keep the lights on in Capitol Hill.
How cheap? According to Bloomberg, during an auction of short-term bonds last week, the Treasury received nine-times as many bids as it needed to sell off all its $30 billion worth of debt. The interest rate it offered: 0%.
Let me repeat that: The U.S. government can sell its debt without paying any interest at all. Zilch.
At Wonkblog, Ezra Klein says there's an obvious policy response in this situation: borrow more. He points out that once inflation is taken into account, Treasury yields are actually negative for five, seven, and ten-year bonds. In other words, investors are essentially paying the government to take their money. It's an ideal time to borrow and spend to put Americans back to work, while passing a deficit reduction bill that takes effect in a couple years.
And it's not clear the government will have a chance like this again any time in the near future. Treasuries have been buoyed by two powerful, but temporary, forces. First, Europe tumbled into crisis, which left U.S. government debt as one of the last safe investments on the market. Meanwhile, the Federal Reserve went on a buying binge, snapping up $600 billion worth of Treasuries in order to try and push investors into other kinds of assets. The Fed's purchases made American debt even more scarce, meaning private investors were willing to accept comically low interest rates in return for a safe harbor to dock their money.
These dynamics will not be around in perpetuity. The same day last week when investors were crawling over each other to buy zero-interest short-term bonds, their desire for longer term treasuries appeared to be waning. Prices dropped and yields rose for both ten-year and seven-year notes, partly because of signs that Europe will be able to get its act together. Our cost of borrowing will continue to rise as investors become more comfortable about putting their money elsewhere.
There's still plenty of time to borrow cheap. On Friday, I posted this chart from Credit Suisse, which shows how the variety and value of safe-haven assets--the investments considered foolproof bets in a rocky global economy--have shrunk significantly since the financial crisis.
Some of the assets that were once considered supremely safe, such as mortgage-backed securities and sovereign debt from countries such as Greece and Italy, might never regain their old value. It will be a while before there are enough safe assets to meet the market's demand.
Still, investors aren't going to bide their time while the global economy settles. Already, many are casting around for new options. As the Wall Street Journal notes, some are looking at corporate bonds for refuge. Per the WSJ:
Today, so many private and public investors are skeptical about government finances that, in a break from the past, markets see debt of some big multinational companies as safer than that of the world's sturdiest governments.
Northern Trust Co. investment strategist Jim McDonald observes that it costs less to buy insurance in credit default swap markets against default of Nestlé or Exxon Mobil than to insure against a U.S. government default, and less to insure against default of Coca-Cola and Wal-Mart than against default by Switzerland or Germany. Given that governments, ultimately, have the power to tax, and companies don't, that is extraordinary.
Is there enough premium corporate debt out there to knock Treasury bonds off their perch? No. But it shows investors are getting creative as they search for alternatives to their old standbys. Just because bond buyers are rushing to Uncle Sam in droves now doesn't mean they will be in two or three years. We should be taking advantage of their offer while it lasts.