Here’s something you don’t see every day, via Bloomberg News:
“The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.”
What’s the deal? As Bloomberg explains,
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
This is more than just a strange quirk. Last week, Moody’s warned that the U.S. may be in danger of losing it’s triple-AAA credit status down the road. There’s no imminent threat, but the clock is ticking. As Kansas City Star columnist Mark Davis advises, crunch time comes in 2013, when “the expected amount of interest will top 10 percent of tax revenues, by Moody’s forecast. And that’s the line in the sand. Beyond 10 percent, our AAA rating starts to wobble. It’s worth noting that Moody’s current forecast assumes interest rates don’t rise much.”
Is this a serious risk? No, according to Treasury Secretary Geithner. It’s simply a matter of reducing the deficit, he said last week. “This is completely within our capacity as a country to solve…it just requires that we find some political will to make those choices.”
However the politics rolls out, it seems likely that all roads lead through health care spending, which is the crucial factor in deficits in the years ahead. On that note, one can be a pessimist or optimist, depending on how one views the health care bill that seems likely to pass the House this evening. Will this be a deficit-reducing piece of legislation, as supporters claim? Or is it just another factor that will drive red ink higher by expanding government’s liabilities, as the skeptics predict? The true answer, we suspect, lies somewhere in the details of the byzantine health care bill that’s now on its way to becoming law.