Until Treasury rates rise significantly, John Berry says, we should:
stop fretting about the deficit.
All the added federal government borrowing that will be needed to finance the $900 billion stimulus package isn’t going to send Treasury yields through the roof, and right now, that’s the most tangible and immediate hazard of growing deficits. Senators debating the size and nature of the stimulus should stop harping on how much the package would add to the national debt and pass the measure, which is essential to slowing the economy’s plunge into recession. The debt is going up anyway, because falling sales and employment are hurting business and household incomes, sapping tax revenue at every level of government.
Financial markets are fully aware, and not troubled, that the U.S. federal deficit is headed toward $2 trillion this year. Treasury yields reached historic lows in December. They remain 100 basis points lower than when the fiscal debate began, and lower than at any other time in the last half-century.
“With private savings rising, with no competition from capital from the private sector, and with deflationary undertow pulling incomes lower, it is important to remember that Treasury borrowing is filling a very big hole,” Citigroup economist Robert V. DiClemente told his clients in a Jan. 30 memo....
The Treasury Department doesn’t include estimates of borrowing needs tied to legislation not yet passed. Once stimulus becomes law, Treasury probably will move fast to adjust the nation’s borrowing. Last year, as the deficit began to rise, Treasury reinstituted a 52-week bill and increased other bill auctions. Those actions dropped the average maturity of all the debt to just over four years, down from almost six years in 2000. Now... Treasury... is moving to do... monthly sales of seven-year notes this month and additional issues of 30-year bonds. This prospect, larger sales of longer-term Treasuries, has been taken in stride by the market....
The Federal Reserve’s decision to support the mortgage market by purchasing debt issued by Fannie Mae and Freddie Mac may be helping by putting money in the hands of investors willing to buy longer-term Treasuries. A key question is what happens after the recession hits bottom, financial markets stabilize and today’s risk-averse investors start to put their money somewhere other than in super-safe Treasury. At that point, Citigroup’s DiClemente said, borrowing costs for businesses and households would be falling and “Treasury yields should return to a more normal and sustainable 4 percent to 5 percent range.” “That day cannot come soon enough,” he said. In other words, rising Treasury borrowing costs would be a good sign, not a bad one, because it would mean the economy was on the way to recovery...
I confess I would like to see what a 50-year and 100-year bond would sell for--both nominal and TIP
