By Martin Hutchinson
Contributing Editor
Money Morning
With budget deficits on the rise and inflation almost certain to follow, it’s getting easier to see why British or U.S. government bonds are no longer a truly safe investment.
Standard and Poor’s Inc. (NYSE: MHP) last week put Britain’s credit rating under review for a possible downgrade, a precursor to a potential reduction in the country’s AAA credit rating. Since that indignity was avoided even in 1976, when Britain had to be bailed out by the International Monetary Fund (IMF), this raises questions about the safety of an investment in Britain’s government debt.
Needless to say, Britain and the United States have pursued similar policies in response to the ongoing global financial crisis, and are currently running similar budget deficits: Britain’s budget deficit this year will be 12.3% of gross domestic product (GDP), compared with 13.2% for the United States, according to The Economist.
Given those parallels, Britain’s credit review has to raise questions about whether a similar fate might await U.S. Treasuries. Indeed, the 10-year U.S. Treasury yield has already risen to 3.45% from its low of 2.07% in December, and it appears likely to rise even more.
That brings us back to my opening question: Should individual investors who are subject to inflation even consider U.S. Treasury bonds as a safe and secure investment?
Let me give you an extreme example - one that has jaundiced my entire view of government bonds since childhood. My Great Aunt Nan, a favorite relative in my childhood who had operated a small business, retired at 65 in 1947, having been born in 1882, one year too early for a self-employed person to qualify for a government pension in Britain. That was no problem, however - she had pretty substantial savings, which if invested prudently would give her enough income for a comfortable retirement. So she invested those savings prudently - and, indeed, patriotically - in a British government “War Loan” then yielding 2.5%, a “consol” paying income perpetually, with no maturity date.
