Commentary: Fear Not For The T Bill
Whither the withering Treasury market? With the prospect of federal budget surpluses stretching on as far as the eye can see, market mavens fret that Washington could actually pay off the national debt in the next decade, buying out all the current holders of Treasury bonds, notes, and bills. That scares the pros, because Treasuries provide a benchmark for all other investments. Even the Federal Reserve is worried: It has ordered up a study, due in January, on how it will operate in a thin-to-nonexistent Treasury market.
What will this mean to the individual investor? Not a thing. Reports of the Treasury market's death were exaggerated: Even as Congress and the Presidential candidates pledge undying fealty to the idea of retiring the nation's debt, they are busy spending, ensuring a continuing supply of Treasury paper. Besides, investors have far better bets than Treasuries for the fixed-income portion of their portfolios. Even the humble bank certificate of deposit offers better deals.
Investors seem to be getting the message. Since 1994, households' holdings of Treasuries have dropped from $602 billion to a mere $138 billion. "Much of the migration away from Treasuries has already happened," says Louis Crandall, chief economist at New York consultant firm Wrightson Associates. Washington's surpluses pose more of a problem for state governments and pension funds, many of which are obliged to hold Treasuries. They're worried that the stock of debt sold will fall 80% by 2010 (chart).
SPENDTHRIFTS. But they shouldn't fret. In its much-delayed budget for the current fiscal year, which began on Oct. 1, Congress is overspending its target by $60 billion, showering a wealth of election-year projects on members' districts. The gap is about 0.7% of gross domestic product--"the same order of magnitude as George W. Bush's tax cut," which would consume 1% of the next decade's projected GDP, says David Wyss, chief economist at Standard & Poor's DRI.
Such profligacy undermines promises of a $2.2 trillion cumulative surplus, excluding Social Security, between now and 2010. That forecast assumes "discretionary" spending--defense, law enforcement, research, and most government services--will shrink from today's record-low 6.2% of GDP. In fact, since the budget was balanced, such spending has grown almost twice as fast as expected. That trend, budget watchdogs at the Concord Coalition calculate, will wipe out two-thirds of the next decade's non-Social Security surplus.
Both Bush and Democratic nominee Al Gore promise not to invade the $2.4 trillion surplus that is expected to accumulate in Social Security's coffers. But if they launch their promised spending hikes or tax cuts, they're bound to dip into those funds--especially in a recession or bear market. "The booming stock market gave us much of the good surplus news," notes Mark Zandi, chief economist for Economy.com, a forecasting firm in West Chester, Pa.
The prospect of a shrinking supply of Treasuries has depressed the interest rates that Washington is paying. As investors begin to lose faith in surpluses, Treasury yields are bound to rise. That's bad news for current bondholders, who will see the value of their low-rate paper fall. So now is not the time to be buying Treasuries.
Instead, individuals should be looking at the debt of government agencies. Fannie Mae, the Government National Mortgage Assn. (Ginnie Mae), and the Federal Home Loan Mortgage Corp. (Freddie Mac) all offer better returns--0.75 percentage point higher than Treasuries on maturities of 10 years or longer--with scarcely any more risk. For hypersecurity, an insured bank CD carries the same federal backing as a Treasury bill, and pays a 70-basis-point premium even for maturities under 12 months. With those rates, even the most nervous investors can sleep tight--and not let any fears about a dwindling Treasury market trouble their dreams.