NEW YORK, Dec 1 (Reuters) - For at least a century, the U.S. government has been the gold standard against which all other borrowers were judged against, and the country has benefited by selling debt for the lowest yields.
That could be about to change. Some in the United States see a worsening government debt profile potentially upending the role of Treasuries as a floor for corporate debt yields.
Such fears have been stoked as the dramatic selloff of European assets last week spread to Germany, where investors balked at buying up new bunds in an auction. That led more investors to reevaluate how safe even some of the safest government bonds really are.
It may be only a matter of time until these concerns hit the United States, which has its own separate issues of record debt levels, a runaway deficit and a sluggish economy that has so far shown a small response to three rounds of stimulus.
"Currently people are still considering government bonds and U.S. Treasuries to be, if not risk free, then still the benchmark relative to everything else," said Chris Orndorff, senior portfolio manager at Western Asset Management in Los Angeles.
"It's possible that that relationship may change," he said. "It's the rethinking of age old adages, which is that everything must trade above the government yield."
A loss of faith in U.S. debt could send U.S. borrowing costs substantially higher and encourage global investors to seek out alternative safe-haven assets.
In Europe, investors have been reevaluating German debt and demanding higher yields as the country is now seen as having higher risks as the backstop for the troubled peripheral region.
While rare, there have been some recent instances in the United States where corporate bonds traded at lower yields than Treasuries in the secondary market. This practice, already somewhat common in emerging markets, could become more prevalent.
In one example top-rated Johnson & Johnson's bonds in April traded at a negative spread of 24 basis points to benchmark Treasuries, according to data by IFR, a Thomson Reuters service.
In March 2010, benchmark interest rate swaps traded into negative territory for the first time as European fears flared, an indication that corporate debt was deemed less risky than U.S. bonds.
At the time, analysts were divided on whether the move reflected increased appetite for corporate debt amid low interest rates or was about rising concern over U.S. creditworthiness.
The credit default swap market also prices some top-ranked companies including J&J, Microsoft and Exxon Mobil Corp as having lower credit risk than U.S. bonds. |
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