Debt Crisis: U.S. Treasuries and U.K. Gilts Trade Places, Briefly

Bond investors are voting no confidence against governments worldwide; Italian, Spanish climb to danger zone; gold soars

The benchmark 10-year Treasury traded places with the U.K. 10-year gilts at various times on Thursday as global bond investors viewed Treasuries as a higher risk. The yield on British gilts dipped as low as 2.94% midday on Thursday at a time when 10-year Treasuries yielded 2.95%.

The one-basis point difference signaled that bond investors considered British debt a hair safer than U.S. debt, which historically has been viewed as a nearly risk-free asset. The last time investors rated British debt more highly occurred, briefly, in April 2010.

As the day advanced, 10-year gilts retreated to a 2.97% yield, and Treasuries rallied back to a 2.95% yield. But the temporary slip in the relative position of the two debt securities was interpreted by some as a sign of lost confidence in the government’s management of the debt crisis currently gripping Washington.

The Wall Street Journal’s Market Beat blog put it this way: “Assuming markets are perfectly efficient, this means that investors think the UK, which also has a AAA credit rating, is a safer bet than the US, a sign that the Debtpocalypse and imminent credit downgrade of Uncle Sam has soured the US as a safe-haven asset.”

Britain’s Financial Times had this to say: “The current prices come as senior US bankers have raised concerns that the US Federal Reserve is not taking seriously enough the threats from rating agencies to downgrade US debt if politicians fail to agree [on] the terms of a rise to the government's debt ceiling.”

Worldwide, investors are telling the governments of advanced economies that their debt management plans are unpersuasive. Yields on Spanish and Italian debt climbed to dangerous levels Thursday.

The Spanish 10-year yield climbed six basis points to 5.98% and Italian 10-year bonds were not far behind, climbing six basis points to 5.80%. A yield of 6% has often been cited in academic financial literature as leading to a debt spiral from which it is not possible to recover. The decline in Spanish and Italian debt comes after a much-ballyhooed European summit to staunch contagion of Greek debt. After an initial market rally, European markets have been in retreat.

As the U.S. and European Union struggle to get a grip on spiraling debt with all that that entails for a global banking system weakened by portfolios of toxic debt, investors are clamoring to find increasingly elusive safe havens.

Indexing guru Rob Arnott of Research Affiliates, in a wide-ranging interview with AdvisorOne, warned that traditional stock and bond portfolios could be dangerous in a “reflationary environment.” He said TIPS would offer greater safety, and praised high-yield bonds as “stealth hedges.”

Meanwhile, the investment du jour amidst the uncertain outcome of a U.S. debt deal has been gold, which climbed to a record of $1,631.20 an ounce on Wednesday, falling to $1,608.30 Thursday.

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