Time to Sell Bonds

Every time a frightening headline jolts the financial markets, investors flock to the relative “safety” of US Treasury bonds. But just how safe is a “safe” Treasury bond?

The most insidious and dangerous part of the global debt story is hiding in plain sight. US Federal debt is now roughly 85% of American GDP, according to “official” figures. But after including the present value of future liabilities like Social Security and Medicare, US debt-to-GDP soars to nearly 500%.

This kind of debt could push even the world’s most powerful nation down the slippery slope to default. If China, Japan and other big foreign American creditors abandoned the Treasury market, bond prices would plunge and bond yields (which move inversely to price) would soar. Tellingly, bond prices have been dropping already, despite the Fed’s massive $900 billion quantitative easing ($600 billion of new money and $300 billion from maturing securities) initiative designed to keep bond prices high and yields low.

US Treasury debt was once regarded as the safest in the world, but that is changing faster than most realize. Earlier this month the yield on 30-year Treasury bonds climbed briefly above 30-year fixed-rate mortgage securities. This bizarre configuration still persists, which means that the market views John Q. Mortgage-Holder as a safer credit than Uncle Sam. This is not a bullish development. (more)