2010-03-22 09:36:00
US Treasuries No Longer The World's Safest Investment?
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According to recently released data from Bloomberg, two-year notes sold by Berkshire Hathaway Inc. in February yielded less than US Treasuries of similar maturity.
As a matter of fact, a number of debt issuings with similar maturities from blue-chip companies have also traded lower than US Treasuries, including those from Abbott Laboratories, Royal Bank of Canada, P&G and Johnson & Johnson.
This is a remarkable occurrence, the result of investors continuing to fret about the long-term health of the United States.
US Treasuries almost always yield less than corporate debt offerings with similar maturities, but the changing risk profile of the United States has forced some investors to consider parking their money elsewhere.
While the United States still has a pristine AAA credit rating, investors from across the globe are assigning the country a lower grade.
The United States has been forced to sell trillions of dollars in new debt over the past year and a half in order to finance their trillion dollar plus deficits. This rapid increase in the debt load of the United States has caused many to fret, as the United States will face increasingly heavy borrowing costs in the years ahead. Moody's recently pointed out that the United States will need to allocate an alarming 11% of their tax receipts for the servicing of their debt in 2011. There is a reason why US Treasuries aren't considered to be "as safe" as they were just a few short years ago.
Investors are saying through these yields that there is slightly less risk in purchasing two-year notes from the likes of Berkshire Hathaway and Johnson & Johnson than there is in purchasing similar notes from the United States government. That's an incredible turnaround that is the direct result of recent sky-high deficits and a swelling national debt load.
A few more interesting points from the Bloomberg article (which I have linked to below):
-the United States government borrowed $2.1 trillion last year compared to the "$1.08 trillion that was issued by investment-grade companies"
-demand for high-quality corporate offerings should continue to remain strong as corporations improve their balance sheets and the United States government continues to add to its massive debt load
-investors are demanding about 0.6% more in yield to own 10-year Treasuries compared to German bunds of similar maturity
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The bottom line - all of this increased borrowing is not innocuous, and the United States can expect to have to pay some extra costs if they wish to continue borrowing at this clip.
Also, investors around the world aren't going to wait around for Moody's to downgrade the AAA credit rating of the United States - they have already made this downgrade on their own.
Source: Bloomberg.com - Obama Pays More Than Buffett as U.S. Risks AAA Rating
Filed under: The Economic Meltdown
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