While Europe’s sovereign debt crisis has beaten down the U.S. stock market, it has helped the bond market.
Because the European bond market is in such poor shape, U.S. bonds are a relatively healthy investment. Investors have been buying U.S. bonds, because they look good relative to European debt. But that’s like dancing with a cow because your only other option is a pig.
U.S. yields are at record lows, even though U.S. debt has now reached $15.9 trillion, up from $9 trillion in 2007. The 10-year Treasury yield, which has averaged 4.88% over the past two decades, hit a record low of 1.44% on June 1, down from its high for the year of 2.4% percent on March 20.
Regardless, the cow may be turning into a pig. Robert Auwaerter, head of Vanguard Group’s fixed-income group, predicted that unless the U.S. gets its debt under control within the next four years, U.S. bonds will become about as popular as the bonds of the five European countries that have seen borrowing costs soar as investors boycotted their bonds.
What Bloomberg called a Treasuries Doomsday isn’t on the Mayan calendar, but it could be as grim as those end-of-days predictions, at least from a financial perspective. If yields were to rise back to 3.8% by December 2014, which is their average for the past decade, investors would realize loses of 10.8%.
Demand for U.S. bonds has enabled the Federal Reserve Board to keep borrowing costs low, and President Obama and Congress to fund a budget deficit that’s forecast to exceed $1 trillion for the fourth straight year.
However, Auwaerter said, “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough.’ ”