Free exchange: Bond shelter

America’s ability to issue debt is helped by a resemblance between Treasuries and money

Mar 10th 2012 | from the print edition

IN A financial landscape full of oddities, the prospect of America being paid interest by its creditors when its national debt is rocketing is one of the oddest. The Treasury recently disclosed it is exploring how to let investors enter negative yields when bidding at debt auctions. Clearly, demand for American government debt is driven by much more than a hunger for returns. Financial-market participants use Treasury bonds and bills as collateral to secure lending, for instance. And for risk-averse investors such as foreign central banks, money-market funds and retirees, America’s debt is uniquely suited to storing savings without much due diligence. In short, its government debt is a lot like money.

This analogy is not perfect, of course. Treasury bonds are less useful for buying things and government debt carries at least the possibility of default. But in terms of liquidity, risk and returns, few things come closer to money. In a recent paper* Arvind Krishnamurthy and Annette Vissing-Jorgensen of Northwestern University quantify the money-like properties of American debt by comparing its supply from 1926 to 2008 with market-based measures of safety and liquidity. They find that when the supply of Treasuries is lower (as measured by the debt-to-GDP ratio), demand goes up, widening the spread between their yields and those on AAA-rated corporate bonds.

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It’s not about Berlusconi

Nov 11th 2011, 16:51 by G.I. | WASHINGTON

ASK any pundit why Italy is in crisis and they will mention some combination of Silvio Berlusconi, a towering national debt, and a moribund economy. The explanation resonates since all three have undeniably been enormous negatives for Italy. Today’s market action seems to vindicate the reasoning: with the prospect of a new government under Mario Monti and speedy implementation of a new budget, Italian bond yields have plummeted below 7%, and stocks around the world have rallied.

But these factors are not the root cause of the crisis and as long as Europeans behave as if they are, a resolution will elude them.

Italy has been burdened by Mr Berlusconi, a large national debt and a moribund economy for most of the past decade. As Daniel Gros points out, some of Italy’s key fundamentals—investment, R&D, educational attainment—have actually improved relative to Germany in that time. Yes, its debt remains a problem but, unlike Greece, it did not suddenly spiral out of control and was not, as far as we know, systematically underreported. As recently as 2009 Italy’s debt was 97% of GDP (it’s 100% now) and its deficit was 5% (compared to 4% this year, according to the IMF). Yet that year Italy could borrow at 4%, not much more than Germany, whereas now it must borrow at 6-7%, triple what Germany pays.

What changed is not Italy’s political or economic fundamentals but how investors perceive Italian debt.

American government debt: Bond market optimism should scare us

May 16th 2011, 20:26 by G.I. | WASHINGTON

TODAY, Treasury reached its debt ceiling and began emergency manoeuvres to gain a few months before running out of borrowing room. Most everyone agrees that failure to raise the debt ceiling before that happens would be a calamity. Tim Geithner, the Treasury secretary, has just  warned for the umpteenth time that it would lead to “ catastrophic far-reaching damage”, sending interest rates skyrocketing and unleashing chaos on the American economy and the financial system.

The credit-rating outlook: A warning shot

S&P’s bombshell means more politically than economically

Apr 20th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

SCEPTICS have wondered how long America could use its control of the world’s reserve  currency as an excuse to rack up huge debts. Now they may have their answer. On April 18th Standard & Poor’s (S&P), a credit-rating agency, said it had lowered the outlook for America’s AAA credit rating, the highest, to negative.

Many rich countries have seen their debts and deficits balloon in recent years. According to S&P’s own calculations, America’s net debt of all levels of government, at 75% of GDP, is in the same range as the net debts of Germany, France and Britain, all rated AAA (see chart). But those countries, S&P frets, “are all now doing more about it” than America is. The agency had briefly put Britain’s rating on negative outlook, but lifted it when the coalition government swung towards austerity. The prospects of America following suit, says S&P, are hobbled by the fact that Republicans and Democrats cannot agree on how to tackle the deficit.

The Fed’s big announcement: Down the slipway

“Quantitative easing” is unloved and unappreciated—but it is working

Nov 4th 2010 | WASHINGTON, DC

[Greg Ip] EVEN before the Federal Reserve unveiled its second round of quantitative easing (QE) on November 3rd, critics had already denounced it as ineffectual or an invitation to inflation. It cannot be both and it may not be either.

The announcement of “QE2” was hardly breathtaking. The Fed said it will buy $600 billion of Treasuries between now and next June, at about $75 billion a month, although it also said it could adjust the amount and timing if need be. That was about what markets expected but far less than the $1.75 trillion of debt it bought between early 2009 and early 2010 in its first round of QE. Yet QE2 seems already to have exceeded the low expectations it has aroused. Since Ben Bernanke, chairman of the Fed, hinted at it at Jackson Hole on August 27th, markets have all done exactly what they should (see chart).

The original article is linked here.

Sovereign-debt managers: Rollover roulette

[Greg Ip] WHEN financial turmoil threatened to engulf Ireland last month, the government took an unusual step: it scrapped bond auctions for the rest of the year. The move was possible because the country has enough cash to last until next May.

Over the past two years Ireland’s National Treasury Management Agency (NTMA), which manages the state’s debt, has maintained a cash cushion of €20 billion ($27.7 billion), equivalent to 12% of GDP. It did the bulk of its borrowing through long-term bond auctions, resulting in a relatively long average maturity for the national debt. The IMF reckons that next year Ireland must finance the rich world’s largest budget deficit as a share of GDP. But it needs to refinance only a modest amount of maturing debt (see chart). In contrast, huge refinancing needs helped drive Greece into the arms of the fund and of its euro-zone peers in May.

The entire article is linked here.

 

Government bonds: A bull market in pessimism

[Greg Ip] WHEN Japan slid into deflation in the mid-1990s bond investors were caught unawares. As late as 1995 yields on government bonds, a haven in times of deflation, were still approaching 5%. Investors today are not about to repeat that mistake. Inflation may be positive in America, Britain and Germany, but in all three countries government-bond yields have plunged to lows exceeded in recent times only by levels during the 2008 panic.

America’s municipal-bond market: State of pay

 

Dec 10th 2009 | WASHINGTON, DC
From The Economist print edition

A federal subsidy may change the market for good

 

[Greg Ip] THE federal government may have astronomical deficits but it can still borrow with ease at rock-bottom rates. Not so states, municipal governments and other government agencies, such as school districts and public-transport bodies, which have historically borrowed at lower rates than the Treasury. That is because interest on municipal bonds is generally tax-exempt. Investors accept a lower yield on a muni-bond than on a comparable Treasury bond on which they pay tax.

Thanks to the financial crisis, however, that position has changed: municipal yields are much closer to and, in some cases, above those on Treasuries (see chart). Some borrowers have scaled back or shelved planned borrowing.

America’s public debt: Tomorrow’s burden

Oct 22nd 2009 | WASHINGTON, DC
From The Economist print edition

America’s debt crisis will be chronic, not acute

Illustration by Belle Mellor

 

[Greg Ip] AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University.

But what kind would it be: acute or chronic?

Why Treasury bonds are selling off

Too much of a good thing

Feb 5th 2009 | WASHINGTON, DC
From The Economist print edition

 

The original story is linked here.

A wave of new borrowing threatens a port in a storm

 

IN THE trouble-tossed world of finance, the one safe place during the credit crisis has been America’s vast and liquid Treasury-bond market. No longer. Since touching a record low of 2.04% in mid-December, ten-year bond yields shot up above 2.9% on February 4th, continuing a sell-off that made January the worst month for government securities in decades.

There are several reasons for the reversal of fortunes, not all of them bad.