Despite concerns about the long-term fiscal health of the United States, bond rates remain low as Europe continues to dominate the headlines. Click chart for more on bonds.
NEW YORK (CNNMoney) -- Bond yields are slowly creeping up in the United States as the economy improves. But with a yield barely above 2%, the 10-year Treasury is still not that far above its all-time lows.
How much longer can that last?
On the one hand, you may not want to fight the Fed. The Federal Reserve seems hell-bent on keeping rates low for a very long time. It has already said that it plans on leaving a key short-term bank lending rate near zero until at least mid-2013. The rate has been there since December 2008.
But there is already a lot of speculation that the Fed may push its low-rate pledge to 2014 when it concludes a two-day meeting Wednesday.
What's more, the Fed will publish the interest rate forecasts of individual Fed members for the first time tomorrow. So we'll also find out how high policymakers think rates should go for the next few years.
There is also chatter that the Fed may want to launch a third round of so-called quantitative easing, a plan that essentially involves printing money to buy more long-term bonds, after its current Operation Twist program ends in June. Through Twist, the Fed is selling shorter-term securities in exchange for longer-term ones.
Throw in the continued mess that is Europe into the mix and it does make sense that U.S. rates should stay low. Many big investors (and not just the Fed) should be attracted to Treasuries because the problems facing Greece, Italy, Spain, Portugal, et al. are more urgent.
"There is a lot of demand for Treasuries. What the Fed is doing is helping but the European concerns are really what is keeping rates this low," said Brian Rehling, chief fixed income strategist with Wells Fargo Advisors in St. Louis. "There are a lot of European buyers for Treasuries."
That should keep a lid on rates for much of this year. In addition, it's hard to imagine long-term yields going substantially higher unless the U.S. economy really takes off.
"The only chance of a rate spike would be if we had rapid job growth. And I don't expect that since the housing market is still so weak," said Sharon Stark, managing director for fixed income with Sterne Agee in Birmingham, Ala.
Stark said monthly job gains would have to start coming in above 300,000 and that seems like a stretch. So with that in mind, she is predicting just a "slow grind" higher for the 10-year Treasury. She thinks rates will finish 2012 between 2.3% and 2.4%.
At the same time, U.S. politics could come into play in the bond market. And that could eventually push rates a lot higher.
Although fixed income investors have so far shrugged off the bitter partisan bickering in Washington that contributed to Standard & Poor's stripping Uncle Sam of its AAA credit rating last summer, investors can't ignore the obvious forever.
The painful reality is that the United States could one day have a Europe moment if it doesn't get its debt and deficit situation under control. I'm going to go out on a not so large limb and predict that little will be done in DC this year.
We are in the midst of a nasty election cycle. You don't need to watch the State of the Union address tonight to know how it will pan out.
President Obama will talk tough about the need to get the economy back on track in the short-term while also reducing spending in the long-term. But he's unlikely to satisfy the Republicans in Congress who will demand lower taxes and more spending cuts to entitlement programs.
In a nutshell, the United States will likely end 2012 where it ended 2011. Nobody willing to compromise. Pandering to their bases. Still searching for a real plan to cut the debt burden.
Heck, it wouldn't shock me if Congress tried to find a way around the automatic spending cuts that are only coming into effect because the ballyhooed bipartisan "Super Committee" couldn't reach a deal on debt reduction.
The good news (if you want to call it that) is that most experts think the bond market won't care until later this year at the earliest. Investors realize that gridlock will rule the day until after the election. But the market won't be so forgiving next year.
"Politics is a wild card that could hit home later in the year. It's not having that much of an effect right now," said Mario De Rose, fixed income strategist with Edward Jones in St. Louis. "But in 2013, the deficit will likely be the top issue."
Rehling is more blunt than that.
"If the deficit is not dealt with in 2013, the likelihood of a European moment increases quite bit more," he said.
And for those who think that's a bit alarmist? Keep in mind that long-term rates in Italy were below 4% as recently as late 2010. They are now above 6%. And that's down from a high of nearly 7.4% last year.
Bond investors can punish a debt-laden country pretty quickly if they want.
Best of StockTwits: Consumers are thrifty when it comes to food. But handbags? Not so much. McDonald's (Fortune 500) had a great quarter -- although it looks like investors expected it and sold on the news. But Coach ( ) also did extremely well. Frugal luxury?,
Fast food may not be recession proof. Nothing really is. But the recent success of Mickey D's and Taco Bell/KFC/Pizza Hut parent Yum! (Fortune 500) does show that they are better positioned to do well even in tough economic times.,
I am waiting for the yuan menu.
I know that Burger King is testing such a plan. But that's scary. If you want a bacon cheeseburger, you should at least walk to go get it. Sorry. That's the city dweller in me talking. You should at least walk to your garage so you can get in your car to go get it.
This is true for the most part. But Tiffany () didn't have a great holiday quarter, for example. Still, the fact that many low-end and high-end consumer stocks are outperforming companies that cater more to the middle class is a microcosm of the great income divide in this country right now.
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.
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