The United States of Apathy

@CNNMoneyInvest November 22, 2011: 12:02 PM ET
While bond yields throughout much of Europe spike higher, rates for the benchmark 10-year U.S. Treasury remain near record lows. But it can't last forever.

While bond yields throughout much of Europe spike higher, rates for the benchmark 10-year U.S. Treasury remain near record lows. But it can't last forever.

NEW YORK (CNNMoney) -- The stock market is like an overly emotional teenaged girl with an unrequited crush. OMG! My life is over!

Stocks plunged Monday as investors feared (correctly) that the so-called Congressional "super" committee -- or stupor committee for accuracy's sake -- would not reach a deal to avoid mandatory spending cuts. Stocks fell again Tuesday. All of a sudden, investors view the U.S. as the next Greece or Italy.

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But bond investors? They're like the too-cool-for-school kids that don't get bothered by anything. (That's the first and last time you'll hear me refer to fixed income geeks as "cool.") Sequestering? Whatever.

Despite the fact that the stupor committee struck out on a debt deal, yields on the benchmark 10-year U.S. Treasury note fell Monday to 1.96% and remained below 2% Tuesday morning.

That's not that far above the record lows. And it means (since bond yields and prices move in opposite directions) that investors were BUYING American debt.

The nervous Nellie stock market may look at the U.S. and see the next member of the PIIGS. But the bond market still views America as the next Germany: steady and safe. Nothing to see here. Move along.

Simply put, fixed-income investors (including the Federal Reserve and many foreign central banks) continue to believe that the U.S. looks attractive when compared to most of the rest of the world.

"The problems we have are very long-term. The concerns right now are much greater for Europe in the short-term. So the U.S. remains a safe haven," said John Canavan, an analyst with Stone & McCarthy Research Associates, a Princeton-based fixed income and economic research firm.

Debt committee failure: Red flag for investors

And as long as that's the case, expect our nation's least and dimmest in Washington to continue punting on the debt problem.

There is no urgency if the Fed's quantitative easing and Operation Twist keep long-term rates low. More bond purchases by China and Japan -- which collectively own $2.1 trillion in Treasuries -- could give Congress some wiggle room too.

And as long as none of the major credit rating agencies downgrade the U.S. again, that gives politicians even more of an excuse to delay and pray.

Sure, a nasty stock sell-off like we had Monday makes everyone a bit agitated. But unless stocks tank so much that the big banks are in true trouble, Congress is unlikely to fret. That's because momentum-obsessed equity investors have a way of bouncing back and forgetting things quickly.

Remember how the stock market plunged after Standard & Poor's downgraded the credit rating of the U.S to AA+ from AAA? The S&P 500 (yes, I see the irony of quoting the stock index of the very same company that cut the credit rating) is now right around where it was in early August before the downgrade.

You want politicians to panic? Just stop buying long-term bonds and send interest rates higher.

Nothing says "crisis" like a huge spike in borrowing costs to 7%. Then lawmakers have to do something. Just ask George Papandreou. And Silvio Berlusconi. And Jose Luis Rodriguez Zapatero. Greece, Italy and Spain have all named new leaders in just the past two weeks.

So how long can the apathy in the bond market last? Sure, with the U.S. economy oozing along at a tepid 2% clip, fixed income investors can accurately point to sluggish GDP growth as justification for low long-term rates. After all, inflation is usually the main reason for bond yields to spike.

Still, it's not like the economies of Italy, Spain, Greece or insert-name-of-other European-nation-here are growing like wildfire either. Italian yields near 7% are proof positive that you don't need an overheated economy for higher interest rates. An unsustainable debt load will do just fine.

"The trajectory we are on is not sustainable. What Europe is facing is in our future if we do not address the deficit," said Brian Battle, director of Performance Trust Capital Partners, a fixed-income trading firm in Chicago. "The clock may not be ticking in seconds but it is in months and years."

Super committee: What's next

Enjoy low rates while you can.

Bond investors can't shrug off the ineptitude of U.S. politicians and their unwillingness to do anything remotely helpful for the economy in the long or short term forever -- especially if the government doesn't tackle the most significant problem of entitlement programs.

"If we continue to stumble for the next ten years with no effort to curtail healthcare spending, you might see deficit concerns becoming more of an issue for bond investors," Canavan said.

Politicians still bickering a decade from now? Sadly, that's a bet I'd be willing to take.

There eventually could be a day of reckoning where China, Japan and other big creditors just get tired of our Treasuries and dump our debt.

"Investors are in a box. It's not in China's best interest to have a crash," said Frank Trotter, president of EverBank Direct in St. Louis. "But they may start walking away. Over the next few years, rates will have to spike significantly higher."

In fact, if we don't get our act together, I can almost picture China giving America this Big Lebowski (the real Mr. Lebowski, not The Dude) lecture about our bad financial behavior:

"Since you have failed to achieve, even in the modest task that was your charge, since you have stolen my money, since you have unrepentantly betrayed my trust, I have no choice but to tell these bums to do whatever is necessary to recover their money from you."

Best of StockTwits: Three tech stocks -- Netflix (NFLX), HP (HPQ, Fortune 500) and Chinese media firm Focus Media (FMCN) -- are on many investors' minds.

firstadopter: So $NFLX basically sold $200M of itself at $85-ISH [convert strike price] and bought $200M of its stock at $222. Awesome!

The Netflix meltdown keeps gets worse. Cautionary tale indeed. Anytime you see a firm buying its own stock near the highs as opposed to other way around, it's fishy.

mnarayannyc: $HPQ to focus on EPS and FCF - and not revenue growth. Sounds like a utility to me.

Indeed. As I wrote last week, HP may not have bottomed just yet.

GOODGREED: I never buy Chinese companies because their numbers can't be trusted. Accounting standards do not apply. Rules do not exist. $FMCN

That may be a bit harsh. I'd like to think that numbers at Baidu (BIDU), for example, are legit. But you do have to be extremely careful in China.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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