Rock Bottom Treasury Rates Won’t Last For Long
The government has enjoyed extraordinarily low borrowing rates the past few months as investors have flocked to safe and secure Treasury Securities. With equity markets reeling, the focus for many has been on preserving value as opposed to seeking profits but that situation can’t be expected to last.
There are already signs that investors are starting to leave their safe haven now that the calendar has turned. The government is also preparing to auction a large chunk of debt next week, which will flood the fixed income market.
Sure, Treasuries are as safe as it gets but how long can you expect investors to be satisfied with a nearly zero percent return. What does this mean for the government? Well, with the President-elect Obama stating that the federal government will most likely carry a $1 trillion deficit for years to come, it’s not good news.
The national debt is going to balloon in the next few years and we are going to see the fixed income market flooded. With that much supply entering the market the yields can’t help but rise.
The bad news for financial markets is that the Treasury yield is the baseline or foundation for the entire credit market, no matter how low the Federal Reserve lowers interest rates. There is only a finite amount of investment dollars out there and we are going to see a big chunk of that going into government debt, which will leave less dollars for other sectors of the economy.
The national debt was a looming problem even before government spending exploded this year and this will only speed up the eventual reckoning. Everyone knew that our deficit spending was unsustainable and now this latest outflow of fiscal spending has some experts wondering how long will it be before the America’s credit rating comes into question.
