Bonds in Crisis?

One more thing from last Sunday’s “This Week” talk show.

As noted by Paul Krugman, Douglas Holtz-Eakin (George W. Bush’s chief economist) said:

“We are headed straight toward a Greek-style fiscal crisis. We are in the range of the measures of countries that have that.”

Well, let’s take a look at the “measures.” The most obvious measure is the rate-spread on government bonds. A government in crisis, or perceived to be headed toward a crisis, must pay a stiff interest rate premium in order to sell its bonds. The premium is commonly reported in the form of the “spread” between rates for the very strong German bond and the bond of the country in question.

For the record, here are the spreads for governments in crisis, and for the U.S. and others who are not in crisis:

Figure 1

The U.S., as of last week, is actually paying the lowest rate ever recorded on its 10-year bond:

Figure 2

Figure 2 shows the full run of data available from the Treasury, beginning in 1962. The draconian rates of the late ‘70s and ‘80s dominate the series, when Fed Chairman Paul Volker raised rates and hammered out-of-control inflation down. The record low rate at the end of last week was 1.93%, as shown in more detail in the inset.

So, where is the Greek-style fiscal crisis we’re headed for? There’s no sign of it in bond rates and spreads. And if you want further counter-evidence, take a look at the rate for the 10-year Treasury inflation protected security (often referred to as TIPS):

Figure 3

With inflation built into its price, this bond has a significantly lower rate. In fact, as you can see, it has been flirting with a negative rate.

So, the real question is why isn’t the government borrowing what is essentially free money, and using it to put millions of the unemployed to work on infrastructure renewal and similar projects? The big reason is that the Executive branch can’t do this on its own—Congress has to approve it. And that’s not going to happen with House Republicans ready to block anything that looks like government spending.

(By the way, Figure 3 comes from the ever useful FRED (Federal Reserve Economic Data archive.)


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