We’ve said it before and we’ll say it again: When the wolf is at your door, when it’s time to head out to your shack on the alkali flats stocked with beef jerky and shogun ammo, when the only thing between you and the abyss is a semi-rabid dog you nursed back to health after finding it in the scorched husk of a ’79 Chevy Nova, there’s one place where global investors want to be. U.S. Treasurys.
Tradeweb Check out 10-year German bund yields rising higher than the 10-year T-note recently.
Over the recent years, we’ve heard plenty of valid complaints about the U.S. Sure we’ve got a debt-to-GDP ratio that S&P estimates will be at 74% of GDP by the end of the year. By comparison, Italy is at 100%, France is at 81%, Germany is at 57% and Spain is at 56%, according to UBS research.
And that’s just counting the marketable debt, meaning the bonds and bills that you can trade in the secondary market.
According to UBS analysts roughly $4.7 trillion in U.S. debt is currently locked up in intra-governmental accounts such as the Social Security trust fund. If you toss that bit of debt into the mix, we’re at about $15 trillion in debt, that’s about what our national paycheck — in the form of GDP — is. So our total gross public debt is at roughly 100% of GDP.
And sure, we’ve got a political system so polarized that it seems incapable of doing the obvious things — cutting spending and raising taxes — that would stabilize our debt load. And yet, as the European crisis worsens investors are increasingly opting for Uncle Sam’s paper over Germany, which is widely seen as the poster child for fiscal rectitude. Essentially this represents investors pricing in the fact that Germany is increasingly likely to be on the hook to foot the bill for any eventual resolution of the Eurozone crisis. Capital Economics analysts recently wrote of the difficult position of Germany:
The dilemma facing Germany is not new. It is just that time is running out. Soon she will have to decide whether to compromise her integrity or allow market forces to take their course. Either option is likely to be bad news for Bunds. Consider the former first. Quantitative easing and common euro-zone bond issuance may be the only ways to draw a line under the crisis given the limitations of the existing arrangements. Yet in the unlikely event that Germany gave ground on these issues, Bund yields would probably soar as investors fretted about the inflationary consequences and the pooling of credit risk … Intransigence could be just as bad. Granted, investors might take comfort from the fact that Germany was not willing to throw good money after bad. But this attitude would simply reinforce the impression that she was unwilling to prevent a disorderly break-up of EMU. In that scenario, it seems very likely that investors would want to give the euro-zone, including Germany, a very wide berth.
So what’s the upshot? Basically over the last week or so, the yields on German bunds have popped up above U.S. Treasurys. At last glance, German 10-years are yielding 2.28%, compared to a 2.01% for the 10-year T-note. Yesterday, the spread — or gap between the two yields — hit 31 basis points. That’s roughly the territory where they were during the worst of the financial crisis. Not a great sign.
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