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Why is Washington ignoring the bond markets?

In 1993, we had to cut the deficit because the bond markets said we had to cut the deficit. Today, they're not saying anything of the sort, and yet we still have to cut the deficit. Why did the bond markets matter in 1993 but they don't matter in 2010? Stan Collender explains:

Most important, however, what the bond market is saying today is different from what deficit hawks and GOP critics of the Obama White House want to hear. As a result, the echo chamber that amplified and repeated the bond market’s message almost two decades ago doesn’t exist today.

By Ezra Klein  |  August 12, 2010; 10:12 AM ET
 
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Comments

This is the best that Stan can come up with? He is usually somewhat insightful, but this 'article' is full of weaksauce.

Posted by: novalifter | August 12, 2010 10:29 AM | Report abuse

The bond market is saying that it expects deflation ahead and not inflation. The conclusions Collender reaches about the deficit are a complete non sequitur.

Posted by: bgmma50 | August 12, 2010 10:37 AM | Report abuse

At this point, the bond market still thinks the US can and will pay back it's debt. The instant the bond market thinks otherwise, it's SHTF time.

Posted by: bgmma50 | August 12, 2010 10:54 AM | Report abuse

It was never about what the "bond markets" were saying. It was and is now about what Robert Rubin is saying. He doesn't want stimulus or ther expiration of the Bush tax cuts on the rich, but he wants to see entitlements cut.

Posted by: Mimikatz | August 12, 2010 12:11 PM | Report abuse

Would an observer in early October 2007 have been wise to suggest the economy was going to be fine because the stock market had just rallied to a record high? If not, why not?

In any case, the problem is that the government fully intends to rollover its debt at maturity. It's the refinancing risk that is of concern, not the going interest rate today.

The government can borrow at 2.7% for 10 years - but what if 3mo t-bills are yielding 6% in 2020? If debt is at 100% of GDP, our interest costs as a percent of GDP will quickly soar to 6% from closer to 1% today. But soaring interest rates will increase our deficits/debt, which compounds risk and will itself lead to higher rates.

With a high debt burden, all it takes is the first initial spike in rates for the game to be up. And the EU isn't going to be able to save us. Our choices will be either default or the printing press, which is the same thing.

Posted by: justin84 | August 12, 2010 12:13 PM | Report abuse

Misses the point. Bond holders are grinning silly at the moment. Already low interest rates at the long end of the yield curve are being pushed even lower by the Fed's latest policy move. And since bond prices change inversely to interest rates, those who owned long term debt (government and corporate bonds) before the announcement are sitting on more capital gains now.

Rudderless leadership for the economy, Congressional gridlock, persistent high unemployment, and a tepid recovery. Would it be a stretch to think that at least a few holders want to preserve the current situation as long as possible? Short sighted thinking to be sure but when did that ever get in the way of profits.

Is it as good as it gets for bonds? Eliminating the federal budget deficit is unlikely. Containing it would be more realistic. Other than that, the only thing more bullish for bonds in the short term would be deflation.

Posted by: tuber | August 12, 2010 1:04 PM | Report abuse

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