Do Deficits Matter? Not to US Bond Buyers

At the Agora conference, I addressed deficit concerns by discussing the record low yield on US Treasuries. If the investing universe was so concerned about deficits, why the record low yield?

Part of the answer is the lack of alternatives. Where else are you going to park yield seeking money? Euro denominated issues? UK debt? Japanese bonds, emerging markets? Amongst the motley crew of sovereign debt issuers, the US Treasury is the least ugly girl at the dance.

I believe my exact phrase was “In the land of the blind, the one-eyed man is king.”

This morning, I see Bloomberg noting that US two-year notes are selling with the lowest interest rates — ever:

“The combination of record-low yields on two-year notes, 10- year rates below 3 percent and a deficit projected to surpass $1.4 trillion for a second consecutive year is a signal that the bond market is less concerned with government spending than with getting the economy back on track. . .

While investors forced European governments to cut spending and grapple with their sovereign debt crisis and pushed yields on two-year Greek debt to 18 percent, demand at Treasury auctions is the highest on record. By keeping borrowing costs near record lows, investors are providing the Obama administration with the opportunity to pursue additional stimulus measures before demanding a reduction in the deficit.”

Go figure. The usual suspects have got it wrong again . . .



Deficits Don’t Matter as Geithner Gets Lowest Yield
Daniel Kruger and Rebecca Christie
Bloomberg, July 26 2010

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