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THE CASE FOR BORROWING BIG, AND QUICK.
There's some evidence that demand for Treasury debt might be waning. That makes sense on a number of levels: Deficits look bad and so the risk of default -- though quite small -- inevitably inches upwards. There are signals that other markets are stabilizing and their products may once again be worth investing in -- and may even be extremely good deals. International investors aren't quite so terrified and so aren't essentially trying to hide their money beneath the United States' mattress.
We're probably at the beginning of the period when it becomes more expensive for the government to borrow. Since the recession began, it's been uncommonly cheap. As the recession ends, it'll normalize. So if the government is planning to borrow a whole bunch of money in the near future, it might be a good idea to lock it in now, while 30-year rates are low, rather than later, when they rise again.
COMMENTS (26)
You're absolutely right. The time to borrow is while people are still shell shocked by the stock market debacle, the fear of credit risk on corporate bonds, and while the real estate market remains in the toilet.
At a certain point it will dawn on investors that locking in 2-3% interest rates on government bonds is just not going to give them the return they need. You can already see a drop in the price of government bonds as a result. Moreover, institutional investors, who are big purchasers of government bonds, are starting to sniff around for opportunities in the TALF program and dealing with other distressed assets where there may be huge upside.
If the government can finance a huge amount of additional debt at 2-3% before greed displaces fear, it would be crazy not to.
Posted by: Sir Charles | May 12, 2009 2:58 PM
u.s. debt is denominated in dollars. the only way the u.s. defaults is that it becomes a failed state. no chance of that in the forseeable future.
now the u.s. might inflate the debt away which you cna think of as a default. so interest rates rise in fear of future inflation.
Posted by: dis | May 12, 2009 3:15 PM
Think again, Ezra. It's already too late to lock in the low interest rates. The reason you are seeing interest rates rise on 30 year treasuries over the past 2 months is because demand has already diminished over fears of future inflation. If Treasury offers more bonds, the rate will rise even faster.
Posted by: bob in fla | May 12, 2009 6:57 PM
Ezra's wrong. If the U.S. tried to dump a huge amount of 30 year debt (into an illiquid market) it would cause a massive spike up in rates and a huge panic in the markets. I sure hope Ezra didn't get this idea from somebody within the administration.
Posted by: bill | May 12, 2009 7:18 PM
It's already too late to lock in the low interest rates. The reason you are seeing interest rates rise on 30 year treasuries over the past 2 months is because demand has already diminished over fears of future inflation. If Treasury offers more bonds, the rate will rise even faster.
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