There are some great datapoints in this Bloomberg story on how worries that investors would shy away from U.S. debt have been exaggerated. And one of the biggest reasons is that Treasuries should actually provide good value going forward:
The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. prepares to sell $115 billion of notes this week.
Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.10 percent today, compared with an average of 2.74 percent over the past 20 years.
Another important factor is that debt issuance in other sectors will likely fall nearly one-for-one:
Citigroup expects that demand to continue as sales in other parts of the bond market decline. While the firm forecasts Treasury supply in fiscal 2010 to be $389 billion higher each quarter than the average from 2003 through 2008, it also sees sales from issuers such as government agencies and companies to be $326 billion lower per quarter.
Skeptics might cry that this is a sign that government borrowing is crowding out private-sector borrowing. But if that were the case, we should see interest rates rising. Instead, rates have fallen by about 30 basis points since all the inflation hyperventilating of a couple of months back.
Brad Setser pointed last week to yet another driver of Treasury demand: China. Despite the headlines that it's getting worried over the expanding U.S. debt, China hasn't stopped purchasing Treasuries:
There actually was more evidence that China was diversifying away from the dollar — in the sense of trying to reduce the dollar’s share of its rapidly growing reserves — from mid-2007 to mi-2008 than there is now.
The reason for this is the same as it has always been. China needs to keep its currency pegged to the dollar. It's hard to tell exactly how much the China factor is helping to keep interest rates low in the U.S., but if it's a major one, we shouldn't be too worried about runaway rates over the next couple of years. Most people who watch this stuff don't believe China is planning to give up on Treasuries any time soon.
--Zubin Jelveh