US Government Bond Market & Interest Rate Watch – No Signs of Worry Over Deficits, Inflation, or Default

Just a quickie to bring your attention to this, yesterday’s close on the U.S. Government bond market as reported by Google Finance. Note the 10 year bond – less than 2%.

Bond Maturity Yield (effective interest rate) change in points(percent)
3 Month 0.01% 0.00 (0.00%)
6 Month 0.04% +0.01 (33.33%)
2 Year 0.19% +0.01 (5.56%)
5 Year 0.86% 0.00 (0.00%)
10 Year 1.99% -0.07 (-3.40%)
30 Year 3.30% -0.11 (-3.23%)

Why does this matter?

There’s two reasons.  First, the politicians and economists who have been opposed to stimulus efforts, either deficit spending increases or monetary stimulus, have been screaming for well over three years now that  these policies were “reckless” and going to lead to inflation.  Some of the more shrill have been seeing “hyperinflation just around the corner”.  They’ve been saying this for a long time but the inflation and hyperinflation simply aren’t happening.  Why?  Well they’ve argued this because they subscribe to economic theories such as quantity theory of money, crowding out, efficient markets, and a whole host of other neo-classical/neo-liberal theories.  These are the same people that claim Keynesian or post-Keynesian or Modern Monetary Theory is totally wrong.  But the data disagree.  These same critics were the ones pushing Washington to cut the budget and not raise the debt-ceiling limit.  They put concerns about the deficit ahead of concerns about jobs or growth rates despite having over 9% unemployment and over 16% slack in the system. They’re wrong. The data and investors in markets are showing them wrong.  Bond buyers aren’t worried about the U.S. becoming another Greece because they know it’s not possible.  Instead the big money is worried about the lack of economic growth and the potential for banking failures in Europe, and that leads them to want to park their money in the safest thing around: U.S. bonds.

The second reason is because these rates are so low, it’s foolish for the government to not borrow more money and invest it in the country’s future. Readers of this blog and my students should know that the U.S. government is not like a household and doesn’t  face the same budget constraints.  But even if you do believe that, why wouldn’t you borrow money at less than 2% and invest it in projects like infrastructure, innovation, and education that bring a rate of return well above that?  There’s no evidence that the private sector is doing any of this investing and the nation has plenty of idle capacity and idle workers that the private sector has shown it won’t hire.  Why shouldn’t a rational government borrow and invest in growing future GDP?  There’s no reason not to as long as you are sincerely committed to economic growth.

If we consider the real rate of interest (the nominal or face rate of interest minus the expected inflation rate) we get pretty much 0%.  The money is being offered to the government essentially for free, yet opponents of stimulus don’t want to borrow it. Proof of this is that TIPS bonds, which are a variety of U.S. government bond where the interest payments and principle is indexed for inflation, are trading with a negative interest rate these days.  The ironic part is that the very people opposed to government borrowing in this environment are often the same people who claim government should act more like a business.  Any rational business that had profitable investment opportunities and also had access to borrow at essentially 0% would rush to say “where do I sign to borrow?”