Teflon Treasuries?

February 6, 2012

The pleasant surprise of Friday’s upbeat U.S. employment report rattled the U.S. Treasury bond market, as you’d expect, encouraging as it did some optimism about a sustained U.S. economic recovery, tempering fears of deflation and casting some doubts on the likelihood of another bout of quantitative easing or bond buying by the Federal Reserve.  And investors wary of seemingly teflon Treasuries are always keen to use such a backup in U.S. borrowing rates as a reason to rethink a market where supply is soaring and national debt levels are accelerating and where the country has just entered a presidential election year.

The release then by Eurostat on Monday of 2011 government debt  levels for the European Union and euro zone — where bond markets have been in chaos for the past couple of years — provided another reason to look sceptically at Treasuries as it showed aggregate EU and euro zone debt more than 10 percentage points of GDP lower than in the United States.

And with no fresh debt reduction plan likely this side of November’s presidential elections, the comparative U.S. debt trajectory over the coming years looks alarming.

Strategists at Societe Generale map the two for effect.













SocGen reckon that as confidence gradually returns to the wider euro zone debt markets over the first half of this year and doubts grow about the U.S. debt mountain, both 10-year German and U.S. 10-year borrowing rates seem likely to climb.

The U.S. is still strugging with its debt problem and the U.S. debt trajectory through 2016 is very worrying

But what of November’s election outcome? Once again, investors return to the employment report for guidance.   The drop in unemployment rate to 8.3% — its lowest since the dark economic winter that was February 2009 — was impressive and seen as a boon to Barack Obama’s re-election chances. But, as strategists at JP Morgan Asset Management pointed out on Monday, no U.S. President since Franklin Roosevelt has been returned to office with an unemployment rate greater than 7.2%.

However, highlighting the fact that Ronald Reagan was returned in 1984 with a jobless rate of exactly of 7.2% but a 1.3 percentage point drop in the rate over the previous 12 months, the JPM strategists said the rate of decline in joblessness may be more important than the actual rate.

It is therefore possible that Mr Obama could be one of those rare presidents returned to office, despite high levels of unemployment.







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