On Monday, January 10, 2011, Portugal was on the hot seat as they were looking at trouble issuing bonds after a sell-off of their debt pushed interest rates much higher to unsustainable levels, according to economists. Further hampering Portugal’s access to capital markets is that other safer eurozone countries were issuing debt as well. Germany and France want Portugal to apply for bailout funding from the European Union and International Monetary Fund, but Portugal has refused to seek aid. By Wednesday, the Portuguese government was able to sell 1.25 billion euros in bonds, auctioning the issues at yields that were below the market’s expectations. The successful auctions eased the week’s earlier concerns with eruo debt, particularly Portugal’s.
China bought some of the Portuguese debt because China is trying to diversify. They are trying to be the world’s big brother and take that edge away from the United States. We feel sooner or later that the real China will show through. You cannot have a communist currency in a capitalist market.
We never expected the PIGS nations—Portugal, Ireland, Germany and Spain—to fail. They are going to be propped up with what they need to in order to keep the eurozone from failing. We believe we will see some austerity measures coming from these countries.
We also expect to see similar austerity measures here in the United States. While not as severe as what we will see in the eurozone countries, we will have to make some definite changes to get us back on the road to a balanced budget.
We go over this with our own clients: It is not how much you can make in the market; it all comes down to how much you spend. It is the same for our country, except the United States can make a money supply out of thin air, as they are currently doing. Interest costs have gone down because of the bond yields are so low. However, imagine what it will be like when interest rates increase. We would think the country would get to a point when they would not want to take on more debt. Thus we feel the country will have to raise the debt ceiling. The United States is not going to default on its debt.
While we certainly are not politicians, we do not understand why the government does not cut spending. If earnings are at 2007 levels, why do they not cut spending to 2007 levels? Who would get hurt? Technically there has been no inflation and no cost of living adjustments in several years. It does not seem like the U.S. debt should be all that hard to fix; however, stimulating the economy back to life has been costly.
Another interesting aspect is what Treasury rates have done. The two-year Treasury increased to 0.61%, which is nearly double the low of 0.33% set in November 2010. The five-year Treasury rose to 1.97%, also more than twice as high as the low of 1.03% set in early November. Ten-year and 30-year Treasurys also continued their rise this week and both are about 1% higher than just a few months ago. Nearly all of them are up 1% and the economy has barely begun to normalize. We suspect many investors are looking into stocks, realizing the market is not that bad. Further, the realization that yields are rising and bond prices are falling is beginning to move assets away from bonds and into stocks. We expect that trend to continue.
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