Ever thought about where the word “credit” comes from, or what it means? The term has its roots in Latin, French and Italian words that mean “belief” or “trust.”
As long as your creditors and investors believe and trust in your willingness and ability to pay back your debts, you are fine. They won’t charge you much interest on your loans — and they will happily purchase your bonds at handsome prices.
|The moment the trust is broken with your creditors and investors, the cheap and easy credit you’ve been enjoying fades away.|
But the moment you break that trust? The moment the market stops believing? The virtuous cycle breaks.
The cheap and easy credit you’ve been enjoying fades away, your cost of borrowing surges, and a whole host of ugly follow-on problems emerge.
All of that brings me to this chart. It shows the yield on the three-month U.S. Treasury bill going back to early 2013 as of earlier this week …
What does it show? U.S. borrowing costs rising for longer-term Treasury bills, just like they were already rising on shorter-term Treasury bills as I showed in my chart last week.
Yes, the absolute level of short-term yields is still very low. But the trend higher is clear — and it’s not just short-term Treasury bills. As you know, I’ve been chronicling the surge in long-term Treasury note and bond yields for more than a year now.
The primary reasons: We’ve seen demand at Treasury auctions slump for months on end now, driving prices down and yields up. And foreigners have been dumping our bonds like hotcakes for months — long before the latest debt ceiling debacle flared up.
Why? The headline in Wednesday’s New York Times says it all: “Viewing U.S. In Fear and Dismay.” We’ve been slowly losing the trust and belief of our global investors for the past year, and this week’s debt ceiling debate debacle only made things worse.
So where do we go from here? Well, some of the surge in shorter-term Treasury bill yields was given back after Washington hammered out a last minute deal. But yields on bills that mature in early 2014 rose.
Why? Because the deal had no long-term solutions in it whatsoever. All it did was establish three new deadlines for investors to worry about.
Specifically, Senate and House negotiators will be required to try to hammer out a longer-term tax and spending plan by Dec. 13. The government will be funded only through Jan. 15. And the debt ceiling will be raised only through Feb. 7. No wonder the U.S. dollar fell out of bed within hours of the deal news leaking, as foreign investors registered their disgust with D.C. all over again.
Bottom line: Our politicians are destroying the belief and trust in us that the world has long held, one crisis at a time. And that is just one more reason I’ve been saying the following:
The end of the great, three-decade bond bull market is here …
The gradual draining away of cheap, easy money is upon us despite the protestations of select central bankers …
And that necessitates all kinds of new investing strategies. They include underweighting bonds, avoiding stocks sensitive to rising interest rates, and hedging against the risk of rate-driven “flare ups” in the markets.
Those are precisely the kinds of things we’re doing in Safe Money, and I urge you to check it out if you’re looking for more specific recommendations.
Until next time,