Tags: Treasurys | fiscal | cliff | flows

WSJ: Money Flows Into US Treasurys Despite 'Fiscal-Cliff' Woes

Monday, 13 August 2012 12:27 PM

Money continues to pour into U.S. Treasury securities despite fears that the country could plunge into a recession next year thanks to an unwillingness among policy makers to halt a fast-approaching sharp fiscal adjustment, experts say.

At the end of the year, tax breaks expire while public spending cuts kick in, a combination dubbed as a fiscal cliff that could siphon over $500 billion out of the economy next year alone and send the country back into recession, most likely in the first half of 2013 if left unchecked by Congress.

Still, money has continued to flow into U.S. Treasury securities, as investors view the European debt crisis as a more dangerous beast and the U.S. as the cleanest of all in the dirty clothes basket.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

The yield on the U.S. 10-year note currently hovers around 1.6 percent, meaning investors are lending to the United States expecting basically nothing in return when factoring in inflation rates.

The United States “effectively got a pass,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, according to The Wall Street Journal.

“If you needed to fly into the safety of a country, the U.S. was the best of the worst.”

Standard & Poor’s stripped the United States of its AAA ratings in 2011 due to the country’s tepid attempts to deal with its debt burdens.

Still, fears that Greece, Spain and other European countries may default and abandon the eurozone have sparked a massive flight to safety in which U.S. debt markets appear attractive due to their size and liquidity.

Still, other experts fear U.S. politicians will get complacent when dealing with fiscal imbalances as long as the European debt crisis drives money out of Europe and into the U.S., keeping borrowing costs low no thanks to U.S. fiscal policy.

“The flight to safety created a lot of complacency,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial, The Journal added.

“Governments need incentives to act.”

Experts have also pointed out that uncertainty over the fiscal cliff is already prompting businesses to hold off on investing in new projects and hiring, which is hurting growth today,

Political bickering in the United States coupled with fears the European debt crisis may rattle nerves here will shave about half a percentage point off growth in the second half of this year, said Vincent Reinhart, chief United States economist at Morgan Stanley.

More than 40 percent of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for reining in spending, a figure Reinhart says could rise.

“Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant,” Reinhart said, according to The New York Times.

“It’s at the macro- and microeconomic levels.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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Monday, 13 August 2012 12:27 PM
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