Treasury Investors Turn Bearish

As the global recovery takes hold, bond investors are increasingly bearish about Treasury debt. That is the consensus of an exclusive Bloomberg survey, which found that investors are the most pessimistic in two years. The survey predicted that Treasury prices will fall, and that yields, which move in the opposite direction, will rise over the next six months.

The fear factor is related to the massive issue of debt to fund bailouts and economic stimulus. Public debt issuance is up 60 percent since 2007, to $7.27 trillion, and now is equal to 9.2 percent of GDP, up from 4.7 percent in 2008, the report says.

To some extent, a rise in interest rates is a sign of progress. It means that global economic growth, and rising demand for goods and services, is pushing prices higher, and that investors want a higher return as a hedge against inflation. That beats global recession, for sure. But in this instance, there is reason for concern. The U.S. has spent a huge amount of money to fight the recession. It has funded that stimulus with debt. To some extent, it has been aided by low short-term rates, which are rolled over to fund longer-term obligations. As shorter-term rates rise, so will the cost of servicing longer-term debt. The risk to the U.S. is in how far and how fast those rates rise. If they soar too much, the U.S. could run into the sort of liquidity issues that brought private issuers to their knees during the last two years. Sound far-fetched? It probably is. But it's worth worrying about anyway, because the risks are so high. It is possible that the ultimate financial failures of the credit crisis will be played out at the sovereign level. To some extent, that is happening now. Moody's warned today that the economies of Greece and Portugal may face a "slow death" due to rising levels of debt as a percentage of GDP.