A Few Notes on the "Doux Commerce" Thesis
The March Payroll Number Is Not Looking So Good...

Department of "Huh?": Default Discounts in U.S. Treasury Interest Rates????????? Edition

The term premium on U.S. Treasury debt is low because even though long-term nominal (and real) rates are low, short-term rates are even lower, for we are deep in recession with an enormous fight-to-safety still going on in financial markets populated by spooked investors.

Economagic: Economic Chart Dispenser

Megan McArdle disagrees, but it is not clear why:

Why is the Term Risk on Long Term US Debt So High?: Perhaps people are worried about future inflation--but while the spread between inflation-indexed bond prices and regular treasuries is rising, it's still rather low.  It's also possible that people are simply anticipating that eventually, a treasury bubble driven by the global "flight to quality" will dissipate, making it harder to unload longer-maturity debt. There's currency risk, too, especially since many of our creditors are foreigners.  And of course, there's the dreaded default risk.  If people stop thinking we're good for the money, they will demand higher interest rates, and tip us into crisis.

It's impossible to say which prevails, but it's not unreasonable to assume that there's at least some default risk pricing in.  Our entitlement problem is about to open a gaping hole in the budget, and so far our solution is... to enact more entitlements. Unless our politicians start outlining some credible plans for getting our demography-driven disaster under control, bond markets would be perfectly rational to demand a discount that reflects a possible future fiscal crisis...

When investors start to fear an increasing chance of default because the government's finances don't make any sense and to price that default into bond yields, it looks like this--for Latvia:

http://sub1.economagic.com/em-cgi/daychart.exe/form

That is not repeat NOT REPEAT NOT!! what we see in the U.S. Not at all. We have $3 trillion more of U.S. government debt held by the public than we did two years ago--and lower long-term interest rates.

Comments