Would You Like Fries With Your Bond Default?

America has pioneered instant gratification. We want everything now: wealth (dot-com stocks), sexual satisfaction (male enhancement pills), weight loss (diet milkshakes), you name it. Bond investors have taken this to its logical conclusion by demanding instant safety of principal in the money markets, and the American spirit of innovation has responded with massive Fed lending backstops. Now they're about get something else instantly: bond defaults on a huge scale.

Let's start with corporate bonds. American companies are having a hard time convincing bondholders that their cash flow is reliable:

The lowest yields on Treasuries are providing no solace to U.S. companies paying the highest borrowing costs on record.
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While rates on everything from four-week Treasury bills to 30-year bonds fall to all-time lows, companies are paying an average 10.8 percent on their debt, up from 6.53 percent in January, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master Index.

The Fed's liquidity-enhancing moves are now crowding out other debt issuers, forcing the yield curve for everything but Treasuries to steepen. That Treasury steepening isn't too far off given the record low yields we've been seeing lately:

Treasuries rose, pushing two-year note yields to a record low, after the U.S. auctioned $16 billion of 10-year securities at the lowest yield ever.
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The $5.3 trillion market for U.S. government debt may be a bubble waiting to burst, according to analysts and investors.

Treasuries have “absolutely” entered a bubble, said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. “There is very little rationality in my mind to bills trading at zero.”

Note that the contra-opinion bubble quote was left for the end of the article. Financial publishers often do that to say that they left themselves a way out in a news item that marks the continuation of a broad trend. As the yield curve steepens, Uncle Sam's interest payments on the national debt similarly steepen. Inevitably we will see an all-American version of the Ecuadorean solution:

Ecuadorean President Rafael Correa said he wants bondholders to accept a “very big” discount in debt renegotiations triggered by the South American country’s second default in a decade.

Ecuador's president is an American-educated PhD economist, according to that article. You don't need a PhD to see the potential for massive bond defaults here in the good old U.S. of A. once the yield curve gets out of control. Perhaps bond issuers can entice their debtors to accept bond haircuts with a quintessentially American sales pitch: "You want fries with that?"