This is the news in US debt catching our eye early this week following the passing of the health care reform bill late Sunday night: charts of yields on US Treasuries are showing a spike in short-term, two-year treasury yields – a spike that lifts them above the yields on corporate bonds for the same time period.
What this means is that the market is (1) already pricing in a potential downgrade in US debt ratings (from AAA to AA+) and that (2) the market is saying that corporate debt over the short term is less risky than US debt.
This last part is phenomenal in itself, because traditionally government debt is perceived to (necessarily) be less risky than corporate debt. As an aside, US Treasuries are essentially the vehicle for the worth of the US dollar generally understood. US Treasuries just are the US dollar, since this is how more dollars are put into the system. So if the Treasury rating is cut, it will naturally spell trouble for the dollar itself.
Biggest Foreign Buyers of U.S. Debt
Berkshire Hathaway Less Risky Than US Government Debt
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Stories circulated yesterday that both Berkshire Hathaway as well as the 2-yr bonds of Proctor & Gamble have lower yields than 2-year US Treasuries.
Yields on the 2-year Proctor & Gamble debt sit just above 1%, while the yield on the 2-yr Treasury shot mildly higher, up to 1.2+%.
The yield on a bond is the amount that the borrower has to pay the lender in order to borrow the money. A higher yield generally indicates that greater risk is perceived to be involved in the loan – hence the need for the borrower to pay a higher rate in order to borrow the money.
Short-Term Benefits of Weak Dollar Will Weaken Over Long-Term
Will Moody’s Downgrade the US AAA Credit Rating?
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Last week Moody’s and Standard & Poors both issued warnings regarding the levels of US debt, suggesting that a downgrade from triple-A status was not impossible. Although most pundits claim that Moody’s would not have the stomach to actually carry out the downgrade, it is notable that these warnings are arriving more frequently.
Yesterday, the IMF issued warnings to most advanced economies regarding overall debt levels. Notably, Deputy Minister Lipsky singled out only Canada and Germany as the two developed nations whose debt-to-GDP ratios would be *less* than 100% by 2014.
The health care reform bill in the US is going to cost an estimated $940 billion over 10 years for taxpayers, but is estimated to shave off about $138 billion in deficits. The proof is in the pudding, as they say, though – we’ll have to wait and see what the actual costs and savings end up being.
I think health care reform is a necessary step for the U.S., but one that should have been taken decades ago, when the US actually could afford it. As cynical as it sounds, it might be too late for the U.S. at this point (on a purely economic level).
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