In case you didn’t notice, the yield; i.e., implicit interest rate, on US Treasury Bills – 10 and 30 year maturity -- dropped yesterday to the lowest rate since November 30, 2010. The closing rates were 2.80% and 4.12%, respectively.
What does this mean? First, no one really expects the US to default on its debt. Granted some short term notes ticked up to reflect that payments may be delayed, but the world still believes the US will pay 10 and 30 year notes when due. On the other side of the Pond, Greece 10 year debt was 14.81% Thursday – implying a loss of about 40%. Translation – holders of Greece debt expect a haircut.
Secondly, it implies slow economic growth and a flight to safety. Why put money at risk if the economy is going to slow? At least put it somewhere; i.e., US Treasuries, where the principal is safe. This is somewhat of concern, but is more driven by near term expectations.
But take a longer view. Although growth may slow in the near term, the low rates for US debt indicate continued faith in the strength of the US… and this faith can only come from the belief the US is getting its house in order. If investors felt the machinations on Capitol Hill are just another partisan spat on the way to business as usual, they would be running for the exits. As is, they are hanging in and signaling belief the US is going through a sea change event for the better:
• Lower deficits,
• Reduced government spending as a percentage of GDP, and
• Reduced payments to individuals as a percentage of government payments.
It appears adult supervision has reached Washington. We are waiting to see, but it could be a great thing for the economy overall. Since the overall economic lethargy appears to be holding back housing formations, an uptick to release this pent-up demand would be a huge boost. Would it require increased liquidity in the private sector? Yes, but that is another issue.
Let’s just hope the market’s expectations become reality.
What does this mean? First, no one really expects the US to default on its debt. Granted some short term notes ticked up to reflect that payments may be delayed, but the world still believes the US will pay 10 and 30 year notes when due. On the other side of the Pond, Greece 10 year debt was 14.81% Thursday – implying a loss of about 40%. Translation – holders of Greece debt expect a haircut.
Secondly, it implies slow economic growth and a flight to safety. Why put money at risk if the economy is going to slow? At least put it somewhere; i.e., US Treasuries, where the principal is safe. This is somewhat of concern, but is more driven by near term expectations.
But take a longer view. Although growth may slow in the near term, the low rates for US debt indicate continued faith in the strength of the US… and this faith can only come from the belief the US is getting its house in order. If investors felt the machinations on Capitol Hill are just another partisan spat on the way to business as usual, they would be running for the exits. As is, they are hanging in and signaling belief the US is going through a sea change event for the better:
• Lower deficits,
• Reduced government spending as a percentage of GDP, and
• Reduced payments to individuals as a percentage of government payments.
It appears adult supervision has reached Washington. We are waiting to see, but it could be a great thing for the economy overall. Since the overall economic lethargy appears to be holding back housing formations, an uptick to release this pent-up demand would be a huge boost. Would it require increased liquidity in the private sector? Yes, but that is another issue.
Let’s just hope the market’s expectations become reality.
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