Treasury demand shows deficits irrelevant with record yields

The inability of the US government to reduce record debt and deficits is being rewarded in the bond market.

For all the concern in Washington that the nation is piling on too much borrowing as the deficit exceeds $1 trillion for a fourth straight year, investors are showing insatiable demand for its bonds. They snapped up the 10-year notes sold by the Treasury Department at an auction last week at a yield of 1.855 per cent, a record low for that maturity. Trading has slowed to levels last seen before the global financial crisis began in 2007 as money managers sock away the securities.

“Are we likely to get out of this unusually low yield environment anytime soon? I don’t think so,” said David Gerstenhaber, who founded Argonaut Management LP after leaving Julian Robertson’s Tiger Mana-gement LLC in the 1990s. While deficits will matter someday, investors’ desire to preserve the value of their capital is capping yields, he said.

“Right now there seems to be more than enough demand for safe haven assets on the part of fiduciaries who need fixed- income,” Gerstenhaber, whose New York-based firm manages $1.8 billion, said in a May 10 telephone interview.

While the amount of Treasuries outstanding has more than doubled to $10.4 trillion since 2007, a decline in securities globally deemed safe enough to meet tougher bank regulations has made the debt seem scarce. Citigroup Inc. says the pool of “high-quality” debt from the US, UK, Germany and nine other European countries is 72 per cent of what it was in 2007.