The Next Bubble
Provided by ABC News
The next bubble: bonds. This week, investors parked their money in an investment with absolutely no return. They poured $30 billion into four week T-bills at zero percent. (At this rate, the government will have plenty of cheap cash to build all the bridges, roads, tunnels, highways and roads it wants—too bad fewer Americas will be able to afford cars to take advantage of all the new infrastructure). Now back to the original point: the demand for bonds has also ballooned in the secondary market, which has pushed yields down to 1929 lows.
The gaping trade deficit and prospects for a protracted and painful recession don’t seem to faze bond-buyers because the market considers U.S. government debt the safest investment in the world. If it turns out not to be, the thinking goes, we’ll all have much bigger problems.
Sound familiar? That’s because it is. At the peak of the buying spree for then-Triple A rated subprime mortgage securities, a common response to skeptical investors was that the majority of homeowners wouldn’t default, and if they did, we’d have bigger problems. Then came the bigger problems: the collapse of Lehman, a worldwide panic in the financial markets, historic level of unemployment, skyrocketing foreclosure rates and the possibility of another depression.
There are signs, however, that some investors are questioning the U.S. government’s ability to make good on all its debt. “The cost of buying protection against deteriorating creditworthiness is surging for every nation; five-year swaps on the U.S., for example, trade at about 66 basis points, a six-fold increase in six months,” according to Bloomberg.
There are countless differences between the sub-prime lending frenzy and the surge in demand for U.S. debt. For one, the U.S. dollar is the world’s reserve currency, which ensures a ready market for U.S. dollars. Additionally, the government has signaled that it will print as much money as it needs to get through the financial crisis. None of this means that the U.S.’s triple-A credit rating is safe. The prevailing view in the market is that the rating won’t change. If that assumption changes, the Treasury bond market will crash.
Then we’ll all have bigger problems. Again.