Debt & GOP
Unanticipated consequences
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IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.” David Stockman, Four Deformations of the Apocalypse. NYT, July 31,2010.
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What will this mean for investors in U.S. Treasuries? Bond investors have been warned to stick with shorter-dated U.S. debt like short-term 1-5 year TIPS (NYSEArca: STPZ) and short-term 1-3 year Treasuries (NYSEArca: SHY). Those looking to squeeze out a little more yield might even be dabbling with intermediate 3-7 year (NYSEArca: FIVZ) and 7-15 year Treasuries (NYSEArca: TENZ).
While this method is a good strategy for a hedge against future hikes in interest rates, it’s ineffective at sheltering an investor from delays or cuts in interest payments from the government. Likewise, it does nothing to protect the bond investor’s principal from falling or even worse – being wiped out.
The Course of Treasuries
Right now is crucial moment for all investors holding U.S. Treasuries (NYSEArca: TRSY). Rejecting false theories that Treasuries are a “flight to safety” or a “riskless investment” are an important step. There’s a confluence of both fundamental and technical factors that will shape their future direction.
