Governments must come up with $7.6T in early 2012 …

2012 redemptions ($B)GDP ($B)10Y yield
Japan3,0005,4580.98%
U.S.2,78314,5861.93%
Italy4282,0516.86%
France3672,5603.30%
Germany2853,2801.93%
Canada2211,5773.90%
Brazil1692,0874.20%
U.K.1652,2482.02%
China1215,9263.42%
India571,7278.38%
Russia131,4796.00%


As we all know, most governments are heavy borrowers and almost all developed nations currently run large budget deficits, which means they spend far more than they generate from taxes. Alarmingly, in spite of the credit crunch and subsequent recession, many nations have increased borrowing leading some analysts to suggest there are no long any truly risk free securities.

A lot of government borrowing must be refinance in 2012, some $7.6T of borrowing in fact. The table above details the amount of debt that must be refinanced, by country, in 2012. I’ve also included the size of each nations economy and, perhaps most importantly, their yield on their benchmark 10Y note.

A curious question when all this debt comes due in early 2012 – what happens to the yields? Many countries, for example The United States, are already benefiting from historically low yields. What happens if investors chose to move into equities, and out of government securities?

The answer, of course, is governments have to increase interest rates to attract funds. As interest rates in government securities rise they also must rise in the broader economy. As the cost of capital rises economic activity actually slows. So why would anyone consider moving out of government securities and into equities? Higher returns, is but one reason.

The S&P 500 currently offers dividend yield of 2.2% and an earnings yield of some 7.6%.

Maybe its time to buy stocks again and (finally) short government securities.

Comments are closed.