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

Category: Credit, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Do Deficits Matter? Not to US Bond Buyers”

  1. Gnatman says:

    Thanks for reminding us of how little the corporate tax portion is.

    AMERIKA fixates on every other disparity but Rangel’s bill to cut the corporate tax loopholes was resoundingly defeated last year.

  2. dead hobo says:

    About a year ago I predicted a stock market crash so that a flight to safety in bonds would result. This would keep rates on govt securities low so that Uncle Stupid could continue to deficit finance happily into perpetuity. Now, a year later, what do we have? A lowered stock market and rates so low they can’t be believed.

    What can we expect? Well. it’s unusual how quiet the ‘bond bubble’ crowd has become. Under normal circumstances, you would expect a rising economy to takes funds out of the safety of bonds so that the funds could be invested in the economy. Investors would be seeking yield. I thought that would happen. Common sense says it will. Yet govt rates are at historical lows with no hint of an increase in sight. If you put on even just a tiny tin foil hat, (such as the one I wore a year ago when predicting a falling market to create a fall in rates a year or more ago) here’s what you can predict …

    Massive deficits need to be financed. Yield is the enemy to Uncle Stupid. Rates must be kept low to make the deficit as affordable as possible. The stock market and the real economy are in competition for these funds. The government will not permit an unmanaged rise in rates while deficits are high. The goal will be to remove funds from Investment in favor of deficits for Government and Consumption (transfer payments and entitlements). As a result, the economy will remain weak, creating the need for additional govt deficit financing of stimulus. A feedback loop that keeps Investment low in order to finance the government will continue for many years. To put it another way, the govt is crippling the recovery in order to finance the deficit.

    The stock market is easier to influence than the economy (I don’t care about Bernanke’s denial under oath.) It’s the safety valve that manages rates and creates the illusion of recovery. Wall Street, the media, and the politicians pretend the economy is the stock market. As long as it remains at managed levels and is not permitted to crash to a realistic level, then the hope is the charade will thrive until the economy gets better in terms that mimic reality.

  3. Super-Anon says:

    Well we know how these things work from watching other markets. Deficits (and more generally default risk) don’t matter until they do.

    Once treasury rates actually start reacting to deficits it’s probably going to be a terminal move.

    In other words, once deficits start mattering to bond holders it’s game over.

    Time to start coming up with names for a new country.

  4. Super-Anon says:

    BTW, I would point out similar logic would dictate that in 2007 there were no valid economic concerns in 2007.

    Clearly nothing was wrong with the economy if stock prices were approaching record highs!

  5. CBs are buying that debt thus keeping the yield artificially low and skewing the market mechanism.The so-called bond vigilantes are tied up and locked in the closet by the Bernanke gang

  6. wally says:

    Corporate profits have, in general, returned to strong levels. What’s happened is that businesses, as always in recessions, have stripped back to profitable operating levels. For them, the ‘new normal’ is just fine. However, they employees they have shed and loan losses they have been compensated for and previous tax payments they have managed to claw back have all been moved onto the government’s plate.

    That’s who now has the problems.

  7. The bond market has always seemed more rational than the stock market, concerned as it is with return OF capital versus return ON capital.

  8. dead hobo says:

    Super-Anon Says:
    July 26th, 2010 at 9:11 am

    In other words, once deficits start mattering to bond holders it’s game over.

    One of the ideas that has been rattling around in my head for quite a while is the concept that if everyone is weakened, then parity remains and everyone remains the same in relation to each other.

    Someone today wrote of the fall of Rome, and stated that everyone in Rome thought everything was OK until the barbarians were at the gate. If Rome had figured out a way to keep the barbarians weak long before their arrival at the gates, then Rome might still exist today. Applying that concept to the current financial problems we face, if Uncle Stupid can keep other countries off balance, then all remain equal.

    Managing the stock market and very likely aspects of world finance have become a matter of national security. If an adversary gets too strong financially, then they could create havoc. Thus, there is a logical reason to keep world interest rates at a managed level by whatever means necessary in order to maintain stability in world financial markets. (ie the US markets). This reasoning implies a need for Homeland Security to be involved in market manipulations of some kind. It’s no longer your grandfather’s stock market or bond market. It’s likely about keeping the barbarians away from the gate while trying to live on borrowed money that will never be repaid.

  9. KidDynamite says:

    “Part of the answer is the lack of alternatives. ” massive understatement!

    indeed: “the US Treasury is the least ugly girl at the dance” but that doesn’t mean you want to take her home and marry her.

  10. carrottop says:

    i have a question,
    please correct the below:

    i thought the even lower federal reserve rates
    allowed the inept bankers to borrow and,
    reinvest the same monies into long term govt bonds,
    sterilizing the liquidity,
    recapitalizing the bank’s balance sheet hole w/ this spread,
    without causing so much taxpayer revolt as the tarp gift did,
    and driving long term rates to new lows.

    for as long as banks can earn with this “free” spread,
    bond rates should converge to short term rates
    until the yield curve gets flat
    (and a real recession kicks in + us elects a glen beck or a sarah palin?)
    there’s a miraculous demand pick up in the economy…

  11. dead hobo says:

    carrottop Says:
    July 26th, 2010 at 9:32 am

    i have a question,
    please correct the below:

    us elects a glen beck or a sarah palin?)
    there’s a miraculous demand pick up in the economy…

    Just these two lines need to go. The recession never left, in spite of the GDP statistics.

  12. Bruman says:

    Barry, I’ve been suggesting similar things to clients, that the UST is really the best of a bad lot, having the fewest problems. I had to laugh at the expression “the least ugly girl at the dance,” though would perhaps be too PC to use it myself.

    I guess the big question to watch is “when will another competing asset start to erode the UST, and how quickly will interest rates adjust higher when it does.” I don’t see other currencies or government debt doing this any time soon – most have either greater uncertainty (EUR), funding problems (JPY), or insufficient depth/liquidity (CAD, AUD, EM currencies).

    To some extent, the corporate bond market may be the bigger competitor, and eventually the stock market. When these start to look more attractive to investors, will rates rise slowly, or will they “snap up,” like a loaded rubber band.

    I don’t know the answer, but I think about it a lot, and wonder what smart guys like you think.

  13. Chief Tomahawk says:

    ” the US Treasury is the least ugly girl at the dance.”

    Is that because she likely has implants???

  14. FrancoisT says:

    What the bond market appears to be telling us is:

    1) The US is still the best place to park our money.

    2) Fix the economy, then then deficit.

    Doesn’t seem very difficult to understand.

    Plus, #2 is logic incarnate; can’t repay your debts if you ain’t making money.

    Must be why some in DC wants to fix the deficit first. ‘Cause if the gubmint (helps to) fix the economy, it’ll look good….and the market could love the present gubmint even more.


  15. NeutralObserver says:

    Barry, please would you share the link or source to that graphic on the US budget? I didn’t see it on the Bloomberg page you linked. Thanks. :-)

  16. pubslinger says:

    Well, I agree with Barry. Perhaps, because I’m an optimist. Better than the alternative; cynicism and pessimism. If that becomes too widespread, the markets are done for.

  17. How ’bout this: US Treasury rates are simply reflecting massive monetary stimulus in a vain attempt to forestall deflation?

    When this all started, it looked to me we would be pushing dangerously close to reigniting inflationary fires with all this monetaray stimulus. But it seems now that deflationary forces are winning the battle, or are at least not losing. Money velocity seems to be declining at least as much as the money supply is growing. Which translates to lower and lower bond rates. How? Inflation (money-cheapening) pushes real (inflation-adjusted) rates below zero. It has happened in every major inflationary period in history (WWII, the early 80′s, etc.). With all the monetary stimulus, the Fed has been just able to keep an all-out rout in price declines from happening. But if prices have been prevented from declining like market forces would have them do, that itself is inflation. Thus bond rates should be declining until they resolve at a real rate something below zero, to reflect the declining price of money in the face of its oversupply. In a near-deflationary environment (CPI at about 1.3% per annum about now), bonds should be priced something below this inflation rate. The 2 year US Treasury is about half the CPI, making the real rate about negative 0.6%. This makes sense in an inflationary monetary environment, where the price for money should be expected to go negative. It reflects the difficulties in imagining that monetary stimulation does anything more than change the accounting. There’s no way to tell what prices would be without the massive monetary stimulus, but prices that want to decline will find a way to do so, and they have, with the prices (interest rates) paid for money.

  18. Rescission says:

    Re: “investors are providing the Obama administration with the opportunity to pursue additional stimulus measures before demanding a reduction in the deficit.”

    If you are in Keynes’ camp, then this would be correct. One problem: you need a President who understands economics and is willing to lead the charge with real projects that will stimulate the economy. So far, its all redistributive and ideological stuff, not real stimulus. He has proven his incompetence and his unwillingness to put the economy first. Its been a waste of taxpayers trust and money. Thus, no bang for the buck. There are schools all over the country in need of repair, roads that need widening, etc. People might be willing to get behind more stimulus if our Leader could articulate where the money was going, rather than playing politics.

  19. DeDude says:

    Does anybody have data on how much is issued of the 2-year, both total and relative to issuance of 10-year treasuries. Is part of the low rate on the 2-year due to a lower supply or is it due to a higher demand?

    Given the size of our current deficit and the likelihood of higher interest rates within a few years, there is no reason to issue a lot of 2-year notes. It is much more in the interest of “we the people” to issue 10-year and longer debt because it will be at least that long before we have any meaningful reduction in the national debt and right now rates are at historic lows that we are unlikely to retain or see again in at least a decade.

  20. Mike in Nola says:

    Simply a result of being in a depression. Nothing better to do with the money and nothing safer, comparatively.

  21. eightnine2718281828mu5 says:

    The bond market has always seemed more rational than the stock market, concerned as it is with return OF capital versus return ON capital.

    And bonds can’t fabricate quarterly numbers to mislead investors.

  22. DeDude says:

    “One problem: you need a President who understands economics and is willing to lead the charge with real projects that will stimulate the economy”

    Correction: You need a Senate where at least 60 Senators are willing to………..

    Our presidents do not make (spending) laws, they enact the laws passed by congress. The reason that half of the stimulus package was wasted on tax-cuts (and other things proven to have almost no stimulatory effects when the economy is heading down), was the political process in the Senate. Yes you need a president who will not veto a stimulus law, but first you need a legislator that will pass it.

  23. Mike in Nola says:

    Austerity sounds better than it is, as the British are starting to find out. Austerity ought to start with eliminating bailouts and vainly trying to prop up overvalued property and equities. As Barofsky testified, the USG spent $700B last year propping up the property market.

    On a related note, one of the things that will make us look comparatively better is what’s going to happen in Britain and the other areas of Europe adopting austerity to satisfy the bankers who’ve already gotten fat and think everyone else should diet.

    Not that Cameron is solely responsible for the coming housing bust. The British bubble didn’t really deflate much and was due to collapse more at some point. But, cutting back jobs and government spending means people can’t afford to pay as much for housing, with more houses going onto the market and falling prices. We all know about the accompanying problems.

  24. Mannwich says:

    @Mike: So true. What galls me to no end is only now after the banking elite cartel and their friends have gotten bailed do they want the REST OF US (who bailed THEIR ASSES out) to austeritize. It would be comical if it weren’t do downright sad and stupid that many of the sheeple now want to go along with this without the requisite “sacrifice” from their masters. Stockholm Syndrome writ large.

  25. epupo says:

    Barry great post, I would add to this though that NYC and its funding problems in the 70′s (while predictable) hit rather quickly once people realized the numbers weren’t working out.

    My feeling is that once a move begins against US bonds it will be hard to reverse

  26. Mike in Nola says:


    I like “austeritize.” Brings to mind “cauterize” and “catheterize”, neither pleasant. Palin would be jealous.

    We need another Huey Long or TR. Although fundamentally different, they were LEADERS who were interested in the good of the majority and not the elite.

  27. [...] a great overview from Barry Ritholz showing how the Federal budget is [...]

  28. Mannwich says:

    @Mike: And those who would “austeritize” are deemed “austeriticians”. Kind of rolls of the tongue.

  29. rhodope says:

    longtime reader.

    I believe the appropriate euphemism for bonds are “Cream of the Crap”

  30. insaneclownposse says:

    I have to agree with John Mauldin that the $1.5T increase in the monetary base by the Fed has very much distorted the Treasury market. I think that a lot of that money still finds it way into Treasuries. I always find it interesting that the size of the QE program is roughly the size of the Federal deficit. I think that the performance of every asset class has to be taken with a grain of salt because of QE.

  31. insaneclownposse says:

    here’s an article from Sprott Asset Management that details some of the issues about who exactly is purchasing all of these Treasuries.

    the article doesn’t really hit the nail on the head, but it does tell us that the GSEs fall into the “other investor” category of Treasury holders. The GSEs are the prime beneficiary of QE because of all of the MBS purchases by the Fed. The amount of Treasuries purchased by the category of “other investor” has risen from $90B IN 2008 TO A PACE OF $680B IN FISCAL 2009!!!!!!!

    presto…. smoking gun and it explains how easy it is for the U.S. to fund the deficit. This took me literally 20 minutes to research. This is not a big mystery IMO……

    We are going to wake up one day and all of our cash is going to be worth dogshit.


    BR: I suspect we will have lots of warning signs before hand. It won’t be an overnight thing . . .

  32. “Do deficits matter”?

    Yes, federal deficits matter. They are absolutely necessary for a growing economy. Deficits are the federal government’s method for adding money to the economy. Deficits are the ultimate source of all money in America.

    Rodger Malcolm Mitchell