By Greg Robb
Why investors are sticking to Treasurys, for now
One finance experts likens U.S. debt to a bad boyfriend that investors would shed, but they just have no better options.
The allure of holding U.S. government debt is fading but investors have not thrown in the towel for one simple reason - their options are limited.
Believe it or not, an apt metaphor for the status of the U.S. bond market comes from Hallmark Channel romantic movies - U.S. debt is the bad boyfriend that investors would shed, but they just have no better options. said Yale Budget Lab's executive director Martha Gimbel, in a remark that caused laughter and head shaking at a Senate Finance Committee hearing this week.
Asked why investors hadn't fled the U.S. Treasury market en masse given the darkening U.S. fiscal outlook, Gimbel replied: &#34;I think one thing to keep in mind is that currently markets don't have a better, great option than U.S. Treasury debt.&#34;
&#34;The way I put it is - we are currently the boyfriend at the beginning of the Hallmark movie, in the big city where the girlfriend is still going out with him, even though she knows it is wrong,&#34; she said. &#34;But at some point, she's gonna go home to the small town and find the nice firefighter and realize there's another option.&#34;
Gimbel, who served as an economic adviser in the Biden and Obama administrations, noted that the eurozone is making nascent efforts to attract bond investors - in other words, to become that nice firefighter.
When rates start to rise in the U.S., investors step in and buy, attracted to the higher yield. That buying puts a lid on how high rates go. Investors are attracted to the U.S. Treasury market because it remains the deepest and most liquid arena, and investors can sell their debt at prices they deem reasonable - that keeps rates in check.
In a sign that the allure has faded, foreigners hold about 30% of the $30 trillion U.S. Treasury market, down from 50% in the early 2010s, according to a study last summer by the Bipartisan Policy Center.
Negative headlines are piling up about the U.S. debt. The U.S. budget deficit fast will average more than 6% of GDP annually through 2036. That's twice the 3% level that is considered the absolute minimum level. Interest payments on the debt are already more than $1 trillion per year and will double to above $2 trillion by 2036.
Gimbel and other budget experts urged Congress to act to get the deficit to a more sustainable path.
&#34;Nobody likes to raise taxes. Nobody likes to cut spending. We need to do both of them,&#34; said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
There are some signs Congress is listening. A bipartisan group of senators on Tuesday introduced legislation to set up a fiscal commission to bring some political cover to the issue.
MacGuineas said there was a real risk that deficit reduction won't happen without a crisis. The U.K. had one of those in 2022, resulting in the ouster of Liz Truss as prime minister. Japan suffered simultaneous drops in currency and bonds last November, and France is engaged in an ongoing battle over its budget and the leadership of the nation.
Back at home, Gimbel said with all the talk of a K-shaped economy - where the rich continue to thrive while less wealthy Americans struggle - there is a desire to get as much new revenue &#34;from the top&#34; as possible.
&#34;I'm not saying we shouldn't get revenue from the top, but ... there's just simply not enough revenue there,&#34; she said.
Also testifying at the hearing was Congressional Budget Office Director Phillip Swagel, who said it was too early to assess the cost of the conflict with Iran.
Swagel agreed with Sen. Elizabeth Warren, the Massachusetts Democrat, that many people are estimating the cost of the conflict at roughly $1 billion a day. But he stressed that estimate wasn't a CBO projection.
The New York Times reported Thursday that Pentagon officials told members of Congress that they estimated the cost of the conflict was $11.3 billion in the first six days.
Economists at Oxford Economics now forecast a $2.13 trillion deficit for the full fiscal year that ends in October. That will widen the deficit to 6.6% of GDP in the fiscal year, up from 6.3% last year.
If Congress moves to pass a defense-spending bill stemming from the Iran conflict, the deficit will widen further, Oxford economists said.
-Greg Robb
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(END) Dow Jones Newswires
03-12-26 1536ET

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U.S. Treasury bonds are likened to a bad boyfriend by finance expert Martha Gimbel, who notes that investors are hesitant to leave due to limited options. Despite a declining allure, the U.S. Treasury market remains attractive due to its liquidity. Concerns about the U.S. fiscal outlook persist, with a projected budget deficit averaging over 6% of GDP through 2036. Experts urge Congress to address the deficit sustainably, while the ongoing conflict with Iran may further widen the deficit. The situation reflects a K-shaped economy, where wealth disparities continue to grow.

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U.S. Treasurys look like the bad boyfriend at the start of a Hallmark movie, finance expert says