Saturday, April 3, 2010

Bond market signals and the US economy

The possibility of persisting budget deficits for the foreseeable future and the resultant burgeoning US public debt stock have sent "bond vigilantes" prophesying lack of investor appetite for new government debt and a resultant imminent steep interest rate hikes in the US. And riding on their backs, conservatives oppose any more fiscal stimulus spending and even cut down on government expenditures.

However, Paul Krugman and Brad De Long have two excellent graphics of the 10 year government bond yields, whose remarkable stability in recent months puts these fears in the right perspective.

It is very clear that despite the bugeoning deficits and debt stock, the long-term markets appear very calm. Inflationary expectations appear well anchored and with the credit markets awash with liquidity and (consumer and business) demand weak despite the zero-bound, there are no signs of any pressure on the credit markets that government borrowing is crowding out private demand.

And Economist points to this graphic that captures the depressed business credit off-take in US and Europe.

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