Experts: Investors Avoid U.S. Bonds, Sensing Pricey Obamacare Disaster

Thursday, 25 Mar 2010 08:10 AM

By Frank McGuire

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Bond investors have avoided two major Treasury Department auctions this week, prompting economists to say there is a looming sense of financial disaster in the wake of President Barack Obama’s landmark — and expensive — healthcare overhaul.

If demand for U.S. debt continues to weaken, experts say the government would be forced to pay higher interest rates to lure investors. Prospects that the $940 billion healthcare plan could add to the massive U.S. deficit would make the nation's debt less attractive to investors because of an increase in supply and less fiscal stability.

Most auctions so far in 2010 have attracted strong demand. Experts say a few lukewarm auctions don’t mean that demand will continue to evaporate. An auction Tuesday of $44 billion in two-year notes also saw demand slip from earlier in the year.

Investors showed little interest in the Treasury Department's $42 billion auction of five-year notes Wednesday, which pushed Treasury higher and prices lower.

Investors were cautious ahead of the five-year auction because of Tuesday's results. Prices extended their slide after the government announced the latest results.

The yield on the five-year note rose to 2.59 percent in late trading from 2.42 percent Tuesday. Its price fell 25/32 to 98 31/32, according to market data.

David Zervos, head of fixed-income strategy at Jeffries, told CNBC that the dismal results may be an indication of how uneasy investors are feeling about the fiscal soundness of the United States, amid big government spending for healthcare and other expensive programs.

“It’s the healthcare-realization trade,” Zervos told CNBC. “We’re coming to grips with the fact that we have a Congress that’s ready to go, and spend.”

Zervos called the Obama White House’s recent initiatives a “fiscal train wreck,” reflecting a lack of restraint.

David Coard, director of fixed income sales and trading at the Williams Capital Group, LP in New York, told the Associated Press that investors could be showing their concern about the amount of debt being embraced by governments, including the so-called sovereign debt of the United States.

"I always hesitate on the basis of a couple of auctions to think that there is a sea change," he said. "But it could very well be that people are shying away from sovereigns in general."

The yield also soared on the benchmark 10-year Treasury note maturing in February 2020, the Associated Press reported. That could translate to higher costs for consumers because the 10-year yield is linked to interest rates on mortgages and other consumer loans.

The 10-year yield rose to 3.86 percent from 3.69 percent. The yield had moved between about 3.55 percent to 3.80 percent in the past two months. Its price dropped 1 11/32 to 98 3/32.

A measure of demand at the five-year auction was weaker than it had been earlier in the year. The bid-to-cover ratio came in at 2.55, compared with 2.75 at an auction in February and 2.80 in January.

The government plans to auction $32 billion in seven-year notes on Thursday. That would make the total auctioned for the week a record-tying $118 billion.

Bill Gross, co-chief investment officer at Pimco, where he helps manage the world's largest bond fund, told CNBC that he prefers stocks over bonds.

"Let's suggest the economy looks good, that risk assets — whether it's high-yield bonds or whether it's stocks — have a decent return relative to the potential of declining bond prices," he said. "I'll go with the stock market."

Gross also cited "the healthcare situation and the $40 trillion worth of present value in terms of entitlements we have in the United States," he said.

"We just added in my opinion another $500 billion in terms of healthcare and the markets are beginning to look at that suspiciously."

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