The US government could soon be brought to you by French health care or Asian pension funds.
Janet Yellen’s Federal Reserve is about two months away from ending its unprecedented quantitative easing program, which at its height bought $85 billion a month in bonds.
Pensions and insurance companies abroad are expected to fill the debt-buying void left after the central bank ends its tapering.
That’s because Yellen’s continental counterpart, European Central Bank President Mario Draghi, announced last week that he expects to keep interest rates there lower for a longer time than the US.
Since the US is expected to raise its benchmark short-term interest rates sometime next year, according to Fed governors’ comments, that could lead to US debt having higher yields than the bonds of other governments, even though they’d be graded as high-quality by credit-rating agencies like Moody’s.
“A couple of buyers of US debt are Asian and European pension and insurance companies who need yield,” Thomas Tucci, head of US Treasury trading at CIBC World Markets, told The Post. “The European situation is going to have low rates for a very long time.”
The Fed has been tapering its bond-buying program by about $10 billion a month since December. The central bank has a balance sheet of $4.45 trillion as of Aug. 6, according to its own data.
After the Fed finally finishes tapering its bond-buying program, it will only be a matter of months before the central bank raises benchmark short-term interest rates should the economy keep growing and unemployment levels continue to generally go down, Fed-watchers say.
But even with Yellen turning off the money spigot, investors have flocked toward US government debt, keeping yields at historically low levels.
“There’s a lack of very low-risk, very short-term debt in the market,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, told The Post.
Yields get lower as bond prices go up, which means that it’s getting more expensive to buy the significantly less risky T-bills.
This year is on track to be the biggest year ever for US companies issuing their own bonds, with about $890.4 billion of new debt issued in 2014, according to data from the Securities Industry and Financial Markets Association.
If it stays on track, this would be the fifth year in a row of US companies selling more than $1 trillion in debt, according to the SIFMA data.
The debt-issuing companies, like Apple and Verizon, have been borrowing record amounts for longer periods of time during the last few years because it’s been cheap, LeBas said.
Much of this money is coming from investors who were buying junk bonds, the debt of significantly riskier companies, like risqué clothing company American Apparel.
That company’s bonds are graded CCC by credit-rating agency Standard & Poor’s, meaning right now it’s “vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”
The next two years could see a major correction among junk bond prices, as borrowing money won’t be so easy to do with rising interest rates.
“At some point we’re going to see the next wave of defaults among corporations,” he said, “and when we do, the downside of the valuations are so high as to be severe.”