Fears of a default have caused the prices of US Treasury bills to skyrocket.
No, wait, you are not paying attention, look at that again: P*R*I*C*E*S*. Not yields. If prices go way up, yields go way down (though not below zero, really).
So, the market is still predicting zero chance of a default on t-bonds. All the market is predicting is that there will be a shortage of new t-bonds after we hit the debt ceiling. The anticipated shortage is driving prices up.
If we expected a default, or inflation there would be a sharply rising term structure in t-bonds. But if anything the terms structure is falling and getting flatter.
Check this out:
What kind of world do we live in? Nobody in the financial world is worried that the US will not pay its t-bonds. They are only worried that, if we hit the debt ceiling, there won't be enough new debt manufactured by our government to meet demand. Debt is our chief export, the only thing that balances our trade balance with China.
Professional wrestling, by comparison, has some elements of realism. NO ONE BELIEVES DEFAULT IS POSSIBLE.
(nod to @tylercowen , who tweeted the link)
3 comments:
Sounds like the US government's credit is the securities equivalent to a Giffen good.
To the tune of "White Rabbit":
One bill makes you larger.
And another bill makes you small.
And the ones that
Congress passes
Don't do anything at all.
Go ask Hayek.
he's ten feet tall....
That's brilliant, Les!
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