Treasury Bonds to Cower in Face of US Debt?
In yesterday’s edition of The Daily Reckoning, our resident short-selling specialist, Dan Amoss, explained why he believes REITs – and especially hotel REITs – offer a delectable short-selling opportunity.
Dan returns today to punctuate his bearish analysis of the REIT sector with an equally bearish analysis of Treasury bonds. “I’m a bear on Treasury bonds,” Dan says unapologetically. “Prices should go down and yields should go up as the creditworthiness of the US government deteriorates.”
If long-term interest rates were to rise as much as Dan expects, the REIT sector would suffer more than most other market sectors. REITs are interest-rate sensitive on at least two fronts. First, since most REITs used borrowed funds to amass their property portfolios, any increase in interest rates would increase their cost of capital, thereby squeezing profits. Secondly, most investors consider REITs “yield instruments.” As such, REITs, much like bonds, will rally when interest rates are falling and fall when interest rates are rising.
In the column below, Dan presents persuasive arguments for selling long-dated Treasury bonds. But first, please allow your California editor to perform a warm-up act by providing his own argument for selling Treasury bonds. Your editor’s argument is embarrassingly simple: Sell bonds because the US government is borrowing crazy amounts of money.
As the nearby chart illustrates in grisly detail, the US government has amassed $1.8 trillion of new indebtedness during the last 15 months. Astonishingly, each and every one of the last 15 months produced a deficit, including the tax-collection month of April, which had produced a surplus for 26 straight years.
So how much is $1.8 trillion, anyway?
Well, let’s see… It’s about 13% of US GDP. $1.8 trillion is also about double what the IRS collected from all individual taxpayers last year. In other words, if every American taxpayer had simply agreed to double his or her tax payments last year, the nation could have avoided this whole deficit mess.
For one final bit of perspective, $1.8 trillion is more than double the total debt America had accumulated during its first 200 years as a nation. America’s debt load did not crack the trillion-dollar level until after 1980. These days, we rack up 200 years worth of debt every six months or so.
Thus, from a purely mathematical standpoint, trillion-dollar annual deficits seem incongruous with 30-year Treasury bonds yielding less than 5%. Less than 20%, maybe.
The initiatives that are aggravating America’s runaway budget deficits are so mindless and uncoordinated they are, to paraphrase White House Chief of Staff, Rahm Emmanuel, “profanely moronic.” As these moronic initiatives pile trillion-dollar deficits atop one another, Treasury bond yields might go to 20% at some point…or the dollar might go to three euros…or both.