U.S. Treasury Yields Surge: Is America Headed for an Emerging Market Trap?

The Prime Directive of Debt

Fascinating. Market observers are expressing shall we say *discomfort* following what they term a 'relentless' increase in U.S. Treasury yields. Long dated Treasuries have surpassed the 5% threshold. It appears that the previously held assumption of U.S. government bonds as a 'safe investment' is undergoing a reevaluation. As Mr. Spock would say "Change is the essential process of all existence." Even for investments apparently.

A Most Illogical Development

The yields on 20 and 30 year Treasuries are exhibiting an upward trajectory currently trading at 5.136% and 5.128% respectively. This is occurring amidst a U.S. credit downgrade and growing consternation regarding fiscal spending plans. One might logically conclude that such conditions are...suboptimal for maintaining investor confidence. "Insufficient facts always invite danger" and in this case insufficient fiscal prudence does too.

The Mould Report: A Warning from Sector 7G

Russ Mould of AJ Bell has characterized the rise in U.S. Treasury yields as reflective of 'growing disquiet' over escalating U.S. federal debt. He postulates that a significant portion of publicly held Treasuries will soon mature and require refinancing at higher rates. This situation he argues bears a striking resemblance to the 'emerging market trap,' a predicament typically associated with less economically developed nations. An interesting assessment. As I live long and prosper I hope the same for these financial institutions so they don't end up like the Kobyashi Maru.

Japan's Yen for Returns

Japan is also experiencing a rise in long term government borrowing costs with the yield on the country's 30 year bonds reaching a record high. This has prompted some investors to repatriate their capital from the U.S. to Japan drawn by the allure of higher yields and the absence of currency risk. As Mr. Sulu would say "Ahead Warp Factor One" as Japanese investors warp home. The closing yield gaps suggests there is a mass migration.

The Emerging Market Gambit

Chris Metcalfe of Kingswood Group's IBOSS suggests that an allocation to global emerging markets debt 'makes absolute sense.' He observes that the increasing yield on U.S. bonds is accompanied by persistent underlying issues. Others note that while U.S. Treasuries retain a degree of safety and liquidity the notion of them being risk free may require revision. It's a bold strategy Cotton let's see if it pays off for them.

Indonesia and Malaysia: The New Frontier?

Emerging markets such as China Indonesia and Malaysia are being considered as potential alternatives for investors seeking to diversify their fixed income portfolios. These nations offer yields that may prove more attractive than those currently available in the U.S. market. One cannot deny the logic of seeking higher returns even if it entails a degree of increased risk. "Live long and prosper" (and hopefully your investments too).