OUR DEBTORS ARE OUR DEPENDENTS:

Bond, Treasury Bond: Bond prices are defying expectations and economic indicators. What does that mean for 2006? (Irwin M. Stelzer, 02/14/2006, Weekly Standard)

ECONOMIC THEORY is clear about one thing: increase the supply of a good and, other things being equal, its price will fall. So the U.S. government massively increased the supply of its bonds in order to finance its deficits, and their price . . . rose. (When bond prices rise, their yields, or interest rates, fall.) When the government was running surpluses of some $200 billion in 2000, retiring bonds and reducing their supply, the interest rates on 10-year Treasury bonds was above 6 percent. Last week, when President Bush sent to Congress a budget projecting a deficit for fiscal 2007 of well over $400 billion, portending a further increase in the issuance of Treasury IOUs, the yield on 10-year bonds was not higher, but lower--around 4.5 percent. [...]

America has now become the country of choice for overseas investors. They find the combination of safety provided by a stable political system and a central bank intent on raising interest rates attractive. So high-saving Chinese and other foreigners, their coffers overflowing with dollars earned from exporting to America, snap up U.S. Treasuries, keeping U.S. interest rates low.

The rapid growth of the American economy, which in the past would have set off inflation-alarms, has not caused panic because globalization makes available to American industry a huge supply of labor and productive capacity. In past years, the 4.7 percent unemployment rate now prevailing would have signaled a labor market so tight as to generate substantial wage inflation. But a pool of low-cost foreign labor and rising productivity have kept increases in wages and benefits within acceptable bounds. Or at least within bounds investors, ever on the watch for hints of inflation, find comforting.

The single most important, generally un-asked, question in modern economics is whether the world could withstand significant reductions in U.S. debt. The answer certainly appears to be, no.

MORE:
Welcoming Back The Long Bond (Oxford Analytica, 02.14.06)

On Feb. 9, the U.S. Treasury issued $14 billion worth of 30-year bonds--reinstating the long bond after a five-year hiatus. The yield was the lowest ever for this maturity, due to high demand from pension funds desperate to match their long-term liabilities. The 30-year bond now yields less than the current two-year Treasury note.

Posted by Orrin Judd at February 14, 2006 1:10 PM