If you want to invest in U.S. Treasuries, it is important to know that global market participants have a history of robust demand for these securities, and their desire for debt sold by the nation’s federal government has not been fazed by major policy announcements – or even fiscal crises.
The fiscal cliff is a term that is used to describe the more than $600 billion in tax increases and budget cuts that would have been prompted if U.S. lawmakers had been unable to come to an agreement resolving their budget disputes. These government officials roiled markets by drawing out their debates, and they finally reached a deal on New Year’s day.
Now that this problem has been solved, at least for the time being, these Washington lawmakers are coming up on another fiscal crisis, according to Bloomberg. The U.S. debt ceiling will soon be reached, and these government officials will need to act decisively so that the country does not default on its obligations.
In the face of this pending debt showdown, holders of U.S. Treasuries are largely unfazed, having faith that the political interests involving the national debt showdown will resolve their differences instead of triggering a fiscal crisis that could create serious financial consequences, which President Barack Obama described as "catastrophic," the media outlet reports.
"It's ugly in Washington, and getting uglier," Matthew Duch, a fund manager in Bethesda, Maryland, for Calvert Investments, which has more than $12 billion in assets under management, told the news source. "But that is just resulting in even lower rates as the market is much more concerned about growth than if the U.S. will be able to pay their bills."
2011 debt dilemma
Think that this situation might be an isolated incident? In August 2011, the United States came very close to not increasing its federal debt limit, and therefore defaulting on its obligations. Fortunately, lawmakers came to an agreement at the last minute.
The political uncertainty had a clear effect on the financial markets, as the volatility of assets was pushed significantly by spooked investors. In addition, the long-term credit rating of the United States was reduced by credit ratings agency Standard & Poors.
The credit ratings agency said in a statement that "the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge," according to The New York Times.
Investors loyal to U.S. debt
While many economists predicted that this credit downgrade would result in the interest rates on U.S. debt being pushed higher, this outcome did not occur.
Later in the same month, investors displayed robust demand for U.S. bonds, and yields on the 10-year benchmark notes pushed to record lows below 2 percent, Reuters reports. In addition, the yields on 30-year bonds fell to their lowest since January 2009.
'Market not worried'
Global investors are not "worried about default," Zach Pandl, who works as a senior interest-rate strategist in Minneapolis at asset management firm Columbia Management Investment Advisers LLC, told Bloomberg.
He noted that "in the U.S., the debt level is lower than comparable countries, growth is higher and we have a unblemished track record in the U.S. of debt repayment, all of which has helped calm investor concerns."
According to Pandl, "the process is messy, but the outcome is always acceptable."