With the flood of economic news still coming out decisively negative, major investor groups continue to stockpile US Treasuries, driving yields back down towards recent record lows.  This may just be a reflection of the general nervous tension gripping markets around the world.  In uncertain times, US sovereign debt has been the safe haven of choice and now that the EU is facing its own set of structural deficit issues, even the diluted US debt seems relatively safe.

So, along the way, US debt and commodities like gold are being bid up.  This has locked up a tremendous amount of pent up investment capital.  While gold has been rewarding investors with recent strong returns, US debt is effectively generating zero real returns, with 10 year Treasury notes yielding less than 3%.  Even if inflation remains tame as unemployment holds back demand, the yield spread above inflation is nearly wiped out.

In the midst of this investment environment, other asset classes like commercial and residential real estate are seen as investment pariahs, leading pundits to come up with all sorts of comparisons to other post-bubble economies.  Yes, it’s true that real estate investments are struggling to hold on to their equity values as investment dollars continue to flow into perceived safe havens.

But, the obverse can also be true.  The highly-priced US debt as an investment is now very likely to far underperform other investments, making them high risk-return investments.  At close to zero yield, there’s frankly nowhere for the price to go, unless the Federal Reserve

somehow buys rates down to negative nominal yields.  Since that’s virtually economic suicide, just like not raising our debt ceiling, the rational outcome would be a reversal of investment capital out of US debt.

When that happens, the debt-driven real estate market would see the most benefit.  Stock markets will likely fall or stay flat with the Federal Reserve already holding onto nearly $2 trillion in US debt that needs to be unwound.  Since the US has been borrowing tremendous amounts recently, the amount of investment capital likely to flow out of US debt will likely be many trillions.  Investors may simply become unsatisfied with the low yields or petrified at possible default.  Either way, those trillions seeking a new safe haven will pour into hard assets like real estate and once again drive prices back up, even before the average buyer has regained the financial ability to buy.

Hence, the time to buy or invest is in the next 12-18 months.  Waiting for demand from conventional buyers may be fruitless.  The millions of units in shadow inventory can actually be quickly sold to major investment funds once they get out of US debt.  Either way, here is where some investors take a stand and either make or lose millions.