NEW YORK (TheStreet) -- Equities in the U.S. look expensive but our debt looks cheap. Overseas it's the exact opposite.
Despite the fact that yields here in the U.S. are "below historical norms" there is still an enormous global appetite for our debt. The full faith and credit of the U.S. government -- the sole issuer of the world's reserve currency -- is still worth a great deal. Even at an annual coupon of just 2.50%, U.S. Treasuries serve as a universal safe haven for investors when things get shaky in the capital markets.
We saw evidence of this Thursday as equity markets were disturbed by geopolitical events in Ukraine (and then Israel). The piddly current coupon did not dissuade investors from piling into Treasuries, the price of which rallied more than a full percent.
Everything Is Relative
Consider the added reward for taking on a bit more risk -- investors currently earn a whopping 30 basis points over U.S. Treasuries by lending to Baa2-rated Italy, a country whose outlook was raised to stable from negative by Moody's earlier this year.
Spain only offers an extra 15bps over the U.S. Treasury on its 10-year paper today. The unemployment rate in Spain is closer to 50% than it is to 0%. The opportunity here may not be to invest in Treasury Bonds, necessarily, but to glean from the macro picture that there may still be more downward pressure on our interest rates than many believe.
The traditional metrics -- economic growth rates and inflation estimates -- can no longer be effectively used to gauge whether our nation's debt is fairly valued. As I see it, there are at least three major factors working against that logic:
1. Federal Reserve intervention/manipulation of both short- and long-term interest rates.
2. The nature of the global debt markets today and the need for fixed income among funds and governments with enormous pools of capital.
3. Our stock market being at a record high -- investors subsequently rebalancing and taking profits -- may be forcing capital back to bonds, a "great rotation" in reverse.