The U.S. bond market is neutralizing budget deficits as an election-year campaign weapon.
Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.
U.S. debt dominated political discourse in the summer when Tea Party-backed members of Congress including Michele Bachmann balked at raising the debt limit. Treasury buyers have since boosted demand at auctions to all-time highs while driving yields to record lows even after Standard & Poor’s stripped the country’s AAA rating. Republican presidential candidates and moderators used the word “job” 43 times and “debt” only 11 at a debate in South Carolina on Jan. 19.
“There is very little political pressure from the bond market because the U.S. benefits from its status as the world’s reserve currency and safe haven,” Jeffrey Rosenberg, the chief investment strategist in New York for fixed-income at BlackRock Inc., the world’s biggest money manager, said Jan. 17 in a telephone interview.
This year’s borrowing cost is forecast to be lower than the 4.4 percent of GDP when Democrat Bill Clinton ran for re-election in 1996 and 4.6 percent when Republican George H.W. Bush ran in 1992, OMB data show. The $474 billion in interest expense doesn’t include cash the government receives from entities such as trust funds.
Concern that Europe’s 17-member common currency may unravel helped drive a 9.8 percent rally in Treasuries last year, the best return since 2008, according to Bank of America Merrill Lynch index data. That’s helping Treasury as it sells a net $967 billion of bonds in 2012, not including Federal Reserve purchases, according to a Jan. 6 forecast made by Credit Suisse Group AG.
“Treasury yields are less about U.S fundamentals and more about European sovereign risk,” said Rosenberg, who helps oversee $3.51 trillion in assets. “That gives the U.S. a lot more breathing room, a lot more rope, a lot more time, than say an Italy or France or Greece or Portugal to fix its fiscal problem,” he said.
Treasuries fell last week on signs the U.S. economy is strengthening and Europe is moving closer to resolving its debt crisis. Yields on 10-year notes rose 16 basis points, the most in four weeks, to 2.03 percent. The yield increased to 2.06 percent at 9:06 a.m. in New York.
The U.S. central bank has also helped keep yields near record lows to stimulate the economy. The Fed left its target for overnight loans between banks in a range of zero to 0.25 percent for more than three years and increased its holdings of government securities to $2.6 trillion, making it the biggest owner of Treasuries.
The Federal Open Market Committee reiterated last month that economic conditions may warrant “exceptionally low” rates “at least” through mid-2013.
“There’s no upward pressure on bond yields for now,” said Ed Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York, who coined the term bond vigilantes in 1983 for investors who protest fiscal policies by dumping Treasuries.
“The Fed has been the great enabler of the government’s fiscal excesses,” he said in a telephone interview Jan. 16. “The Fed’s zero interest rate and quantitative-easing policies have squelched any protests by the bond vigilantes.”
The U.S. “is not a great investment” even as it remains the “safest haven,” former Republican presidential candidate Bachmann said Aug. 12 on Bloomberg Television’s Political Capital with Al Hunt.
“What we do need to do is dramatically shut down that level of spending,” said Bachmann, a congresswoman from Minnesota and Tea Party Caucus organizer who opposed the debt limit increase to $15.2 trillion.
Because of the additional debt, interest expense will rise for a third year, reaching $474 billion, OMB data show, even after yields on Treasuries maturing in 10 years fell to 1.67 percent on Sept. 23, the lowest ever.
Federal debt held by the public may climb 8 percent to $12.8 trillion in 2013, the OMB says. Ten-year Treasury yields are forecast to increase to about 3 percent by the second quarter of 2013, based on the median estimate of economists surveyed by Bloomberg.
“These are monstrous numbers when rates begin to rise,” Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $10 billion, said Jan. 12 in a telephone interview. “The day of reckoning is coming.”
The presidential debates show candidates focused on job creation more than deficit cutting as they seek to make Obama the first president since Democrat Jimmy Carter to be denied re-election when unemployment is dropping.
Republican President Ronald Reagan overcame 7.5 percent unemployment in his 1984 campaign, higher than the rate when he beat his predecessor, as the jobless rate fell 2.1 percentage points that year, the biggest decline since at least 1949.
Obama began his term with joblessness at 7.8 percent, which peaked at 10 percent in October 2009 before falling to 8.5 percent in December.
Ron Paul, who has focused the most on the deficit, has failed to overtake former Massachusetts governor Mitt Romney who was favored by 30 percent of Republican voters in a Jan. 15-19 Gallup poll. Former House Speaker Newt Gingrich was second with 20 percent and Paul was tied for third with ex-Senator Rick Santorum of Pennsylvania at 13 percent.
Paul, a Texas congressman who has called for dismantling the U.S. central bank, said the word “debt” nine of the 11 times it was used in relation to federal borrowing during the Charleston, South Carolina debate on Jan. 19, according to a Washington Post transcript. Gingrich defeated Romney by 12 points in the Jan. 21 South Carolina primary.
Borrowing hasn’t been an issue for the Obama administration. Treasuries yielded an average of 1.07 percent as of Jan. 19, less than the 3.8 percent interest rate when George W. Bush ran for re-election in 2004 and compares with 6.2 percent during Clinton’s incumbency in 1996, Bank of America Merrill Lynch index data show.
U.S. borrowing costs are 4.4 percentage points lower than in 2000 when the nation had a $237 billion budget surplus.
Long-term U.S. government bonds were the best performers in the world last year, returning 29 percent, according to Bloomberg/EFFAS indexes. Investors bid a record $3.04 for each dollar of the $2.135 trillion of Treasury notes and bonds sold in 2011, according to Bloomberg data. That’s higher than when the country had budget surpluses from 1997 to 2002.
“People want our debt, and the interest rates that we have to pay for our debt is quite low,” Herb Asher, professor emeritus of political science at the Ohio State University, said Jan. 18 in a telephone interview.
“That’s actually the saving grace right now,” said Asher, who wrote the book “Presidential Elections and American Politics” and is the founding director of Ohio State’s John Glenn Institute for Public Service and Public Policy.
The U.S. credit rating was downgraded to AA+ on Aug. 5 by New York-based S&P, which cited “brinkmanship” over the debt limit and deficits that signaled the government was becoming “less stable, less effective and less predictable.”
Each party blamed the other for the debt limit stalemate, with Democrats saying Republicans wouldn’t relent on increasing taxes and Republicans accusing Democrats of rejecting an offer to raise revenue along with spending cuts.
The so-called supercommittee of Democrats and Republicans charged with reducing the deficit by $1.5 trillion said Nov. 21 it had failed to find a compromise, triggering $1.2 trillion in automatic spending cuts to take place in 2013.
“The debt problems right now are taking a backseat to the immediate pain of joblessness,” Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on investments of more than $30 billion, said in a Jan. 20 telephone interview.