The case against bonds

When large American financial institutions started to fall one right after another last year, investors rushed into the safety, or perhaps certainty of U.S government bonds.

When all investors run to one side of the boat it is not without consequence. Panicked American investors had at the time, no need or desire for return on capital. Therefore, one did not care whether they made any interest on their government investment or not. Americans wanted return of capital rather than return on capital. If you can’t trust your bank then your next best bet is the issuer of your own currency – the U.S government. As a result, government bonds became popular very quickly.

For a short period of time, anxious buyers were willing to obtain a negative interest rate just for the privilege of buying a U.S treasury bill. Sell stocks to buy bonds was the clarion call.

Central bankers have lowered interest rates to just about zero and are holding them there in the hope that some of that cash on the sidelines will leak back into the economy in the form of additional consumer spending.

Unfortunately, the American consumer is tapped out. Deductible mortgage payments were an incentive to buy much larger and more expensive houses than Canadian homeowners.

Saddled by heavy mortgage and consumer debt, the American consumer is no mood to spend even more. They can’t as they have debt up to their eyeballs. They also have to worry about something else – the recession and skyrocketing unemployment rates.

Along with the monetary stimulus of ultra low interest rates, on the fiscal side, trillions of dollars have been pledged to both bail out and stimulate the U.S economy. However one has to ask the question.

Where are they going to get all that money?

Print bonds and sell them. Everyone loves bonds and government bonds are backed directly by the full faith of the American government.

Things today appear much better. Stock markets have made impressive gains since March 9th. New issues of even junk bonds are being gobbled up as investors are desperate for yield – any yield.

The American financial system is off life support and there are glimmers of hope for a U.S recovery perhaps as soon as this year – maybe even late summer or fall.

What if investors change their minds and don’t want to buy government bonds at zero percent interest?

Could it be that the stock markets are going to recover after all?

Remember everyone rushing to one side of the boat to buy bonds last year?  What if they rush back?