Investors Fuel U.S. Debt, Doubting Recovery

The Fed can try to force investors into equities and spur investment, but it cannot convince domestic investors that any recovery is on the way.

According to the Investment Company Institute, investors have put an average of $16.6 billion per month from September 2011 through July into bond-based mutual funds. Over the same period, there has been an average monthly outflow of $10.9 billion from stock funds.

U.S. investors are buying Treasuries at a much faster pace than they did last year. Record-low yields aren't deterring a massive wave of bond purchases as concerns about the Fed's inability to stimulate the economy or bring down the unemployment rate intensify.

Government debt securities held by domestic buyers other than the Federal Reserve rose 10.7% to $3.61 trillion in the first seven months of this year. In 2011, domestic investors moved out of Treasuries and overall holdings fell 4.6%.

“The high degree of uncertainty has caused excess cash to build up among household assets,” stated Tom Graff, who manages $3.6 billion in fixed-income assets at Brown Advisory Inc. As long as individuals are seeking safety rather than being “return- oriented, then no particular yield is too low.”

Although domestic buying lowered the proportion of international sales, they rose as well. Net international Treasuries purchases rose to $50 billion in July from $32.4 billion the month before, the Treasury Department said Sept. 18.

Even though the national debt has soared, borrowing costs have fallen as investors crowd into what is traditionally considered a safe haven. The record low 1.72% yields on 10-year bonds are enabling the U.S. government to borrow without consequence, even as total public debt outstanding rises above $16 trillion.

All of this may just be the calm before the storm. While the U.S. government has an easy time selling its debt, there are only 98 days left until we drive right off the fiscal cliff on January 1, 2013.

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