As of this morning (post ObamaCare passage),
"Two-year notes sold by [Warren Buffett's] Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson, [Abbott Laboratories, Royal Bank of Canada] and Lowe's Cos. debt also traded at lower yields in recent weeks."
Of course, I'll also note that I think the US should have lost AAA under Bush and lost AA+ under Obama, and that I think the reason AAA is being maintained is because it can be a self-fulfilling prophecy. If more people thought about the US credit rating, I think it'd drop.
Anyway... this should be very scary. The last thing the US needs is their interest rates to go up amidst a recession and a healthcare bill that could quite easily raise unemployment (due to the employer-mandate provisions of ObamaCare).
EDIT: One possible explanation I wrote in a comment section on Marginal Revolution:
"Well, note that the securities whose interest rates dropped below treasuries' largely have pricing power in periods of inflation. (JNJ and ABT are pharmaceuticals with patents, PG has brand power, LOW is a low-cost producer, BRK.A is run by a man who made his fortune off of buying companies with inflation-resistance, and RY is Canadian). They're presumably still higher rates than TIPS. Additionally, most (all but LOW, I believe) also have international exposure. So functionally, you're getting extremely strong US corporations with clean balance sheets and good management who are more resistant to inflation than US government bonds. "
EDIT 2: I realized that my response is somewhat stupid - the bonds are fixed rate and don't have inflation protection - but at least they have a very, very low probability of default if inflation happens. However, that probability can't be less than 0, and that situation can only occur if the US approaches default. Thus, US treasuries should still be the lower bound for what a fixed rate bond should yield.
Perhaps it is a longer/shorter term issue, but it doesn't sound like it. I don't know the answer.
EDIT 3: I've thought about it some more. The only thing I can come up with (other than 'irrationality' or 'computer-generated trades') is that the market has a non-zero probability on a US sovereign default that is not inflated away by the central bank. In that circumstance, you could justify this situation. I don't think that's a likely outcome, but it at least explains it...
EDIT: One possible explanation I wrote in a comment section on Marginal Revolution:
"Well, note that the securities whose interest rates dropped below treasuries' largely have pricing power in periods of inflation. (JNJ and ABT are pharmaceuticals with patents, PG has brand power, LOW is a low-cost producer, BRK.A is run by a man who made his fortune off of buying companies with inflation-resistance, and RY is Canadian). They're presumably still higher rates than TIPS. Additionally, most (all but LOW, I believe) also have international exposure. So functionally, you're getting extremely strong US corporations with clean balance sheets and good management who are more resistant to inflation than US government bonds. "
EDIT 2: I realized that my response is somewhat stupid - the bonds are fixed rate and don't have inflation protection - but at least they have a very, very low probability of default if inflation happens. However, that probability can't be less than 0, and that situation can only occur if the US approaches default. Thus, US treasuries should still be the lower bound for what a fixed rate bond should yield.
Perhaps it is a longer/shorter term issue, but it doesn't sound like it. I don't know the answer.
EDIT 3: I've thought about it some more. The only thing I can come up with (other than 'irrationality' or 'computer-generated trades') is that the market has a non-zero probability on a US sovereign default that is not inflated away by the central bank. In that circumstance, you could justify this situation. I don't think that's a likely outcome, but it at least explains it...
No comments:
Post a Comment