Government Debt Demand to Wane

Investors’ love affair with government bonds may be about to head towards a breakup!

Demand for this kind of debt seems to be waning. Warning signs range from South Korea’s national pension fund declaring that it will shy away from U.S. Treasuries to major fixed income players beginning to favor riskier forms of credit again.

Various bond issues by Japan, Germany and the United States have drawn lackluster responses at recent auctions. Announcements from Britain that it needs to issue more debt to address the consequences of the credit crisis are also weighing heavily on investors.

Much of the reason is price, although the dollar’s weakness is also a factor.

Many bonds have become very costly, with yields falling as the credit turmoil and economic worries have driven demand for safe investments.