World Markets Freak Out After Treasury Yields Spike

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The big story that everyone will be talking about is the rapidly increasing yield on longer-term maturities, and what that means for both the economic recovery and the US’ ability to finance its gigantic debt. Matters of previously theoretical concern (what happens if the world doesn’t want to keep financing us anymore) are now coming into the fore.

European stocks fell by 1.2%, while Asia slipped just under 1%. At this point, US futures are actually pointing a bit higher

Brad Setser has a good discussion of what’s going on in the Treasury market that’s well worth a read. Basically, foreign governments just aren’t that interested in our longer-dated debt anymore. We actually need to attract private buyers, who don’t have political desires, or a desire to weaken their own currency.

In case you haven’t heard, the Treasury market – and the mortgage market — had a bad day. 10-year Treasury yields are back at their November 2008 levels (long-term Treasury yields didn’t fall immediately after Lehman). 3.7% for 10 year money isn’t all that high a rate. Especially for a country with a substantial fiscal deficit. But it isn’t 2% either.

What happened?

In very broad terms, rising supply met falling demand from one important subset of the market. Bringing in new (private) money has required higher yields.

The supply of longer-term Treasuries is increasingly rapidly. Until I looked closely at the data – from the monthly statement of the public debt — I hadn’t realised that the big increase in outstanding supply of longer-dates Treasuries only really came in 2009. The surge in Treasury issuance in 2008 was almost entirely short-term bills.

Over the last 12 months of data (data through the end of April, May data will be out soon), the US issued $735 billion of notes, bonds and TIPs.* In calendar 2008, the increase in supply of longer-term Treasuries was about $400b – a large sum, but easily within the realm of historical experience.

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