Investors looking for better returns or terrified with the growing US debt have seemingly abandoned government paper. So much capital has left government bonds that several triple-A corporations offer lower bond yields than the government that taxes them.
Government Debt Loses Steam
Although Treasuries emerged as the global safe haven after the financial crisis of 2008, investors are now more willing to take risks with Berkshire Hathaway and Johnson & Johnson than the US government. In recent weeks, Proctor and Gamble, Lowe’s and Abbott Laboratories have presented lower yielding paper than government debt with the same maturity, signaling investors are more willing to bet on the solvency of any number of AAA-rated firms than that of the US government.
Moody’s Stern Warning
After the 2010 Federal deficit soared above 10% for the first time in decades, Moody’s issued a stern warning, asserting that the rating agency could not justify giving the United States a top rating if record deficits were to continue. By 2013, a full 13% of the US tax revenues will be used exclusively to pay interest costs on the national debt, an amount that Moody’s considers unreasonable for an AAA-rated government.
Your Best Bet is Corporate
Corporate debt may be the best bet for investors after all. Many firms backed off aggressive debt sales during the financial crisis, but have since found their way back to the market to finance mergers and acquisitions and growth strategies.
As investors grow wary of government bonds, largely due to their low reward interest rates, corporate debt is very appetizing thanks to its low risk profile and potential to appreciate. Foreign corporate debt should be even more appealing to investors, as it provides solid returns with low risk and exposure to other currencies, which will appreciate as the US government solves its looming fiscal crisis.
Remember the Sharpe Ratio
The bond market is full of low debt, high (and improving) income corporations that offer better income to debt ratios than many triple-A would governments. Those looking for reasonable returns and low risk may find it better to buy corporate debt as a substitute for government debt.
However, remember, as always, the government does have the right to tax firms into oblivion. Therefore, no matter how safe corporate debt may be, the government is just one step ahead of the game when it comes to generating revenue.