The most important financial instruments on Earth — long-term bonds issued by sovereign governments are the next victims of too much government debt, including U.S. Treasury Bonds.

Greek government bond collapse the first victim and spreading

On October 8, 2009, Greece’s benchmark 10-year bond was selling for 112.295. Today, it has collapsed to 92.13.

And the drama of its yield surge is even more striking — from only 4.41 percent to 7.14 percent, a jump of more than 60 percent in less than four months.

Portugal’s 10-year government bond reached a peak on December 1, 2009, just 62 days ago. And now it has also started to plunge virtually nonstop, with its biggest declines registered late last week.

British government bonds (gilts) are equally vulnerable.

Sovereign bonds in Spain, Japan, and other major deficit nations are also starting to get hit.

Next Victim: U.S. Government Bonds

In the global competition for investor funds, U.S. Treasuries are typically viewed as the “least ugly.” So global investors have usually been willing to pay a relatively higher price for them, grudgingly accepting lower yields.

This helps explain why U.S. government bonds have not been among the first targets of the deficit contagion. But that does not protect them from becoming one of the next targets.

The U.S. government suffers from the same, or worse, underlying disease as Greece, Portugal, or any other victim of the contagion — massive, out-of-control federal deficits. America’s burden was $1.4 trillion last year and ANOTHER $1.4 trillion this year.

Washington has buried its head in the same mound of sand as Athens and Lisbon — grossly underestimating (a) the size of the deficit, (b) its potential impact on investor confidence, and (c) the speed by which its bond prices can fall.

Like his counterparts in Athens and Lisbon, President Obama ignored advisors who warned of a deficit disaster and has only just begun to seriously consider deficit-reduction measures. And yet he continues to avoid steps that can make a significant difference.

The Dire Consequences to U.S. Businesses and Consumers

Money and Markets’ Mike Larson explains the situation this way:

“Imagine what would happen if Uncle Sam’s borrowing costs shot up like they have in Greece — by 60 percent!

Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about.”

Source: Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich.

Technorati Tags: business, us economy, us debt, us government bonds

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