It’s been a crazy week. Ronny and Donny (from my train metaphor) are still fighting each other, and with every passing day and hour it seems increasingly unlikely that Congress will reach an agreement to extend the debt ceiling that limits how much money the government is allowed to borrow. The partisan bickering has been complicated, hypocritical, deceptive, and boring, but the commentariat has been much more exciting.
We’ve been hearing that if the debt ceiling is not raised, the stock market will crash and interest rates will go up – meaning, ironically, that it will cost the government more money to pay off its debt if we don’t let the government borrow more money now. Investors all over the world will lose confidence in the dollar and no one will want to buy our debt anymore. But as the alleged August 2 deadline has drawn near, interest rates on 10-year Treasuries have stayed remarkably low. Many, including myself, have used this as evidence that the world will not end if the ceiling is not raised. We’re biased against government spending, and when alarmists confidently declare that horrible things will happen if we don’t let the government spend more, we look for ways to prove their confidence wrong. The stock market seemed to be doing fine, too. One of the arguments was that the markets expected Congress to work something out, so that’s why they weren’t responding negatively yet.
Well, the stock market has been dropping all week, and today pretty much the entire world’s markets are in red. There is a lot of interesting movement going on – including things that involve some of the short Treasury bills due in August and insurance rates against default and other complex things. Tyler Cowen tweeted, “The excess citing of low T-Bill rates as ‘no reason to worry’ has come back to bite some economists in the bum.” Maybe the alarmists were right. Now that the market does not expect a deal, the market is hurting.
And yet today the 10-year Treasury rates have dropped even further! They were hanging out in the 2.95%-3% range all week and now are down to 2.85%. Financial articles always give reasons for every movement of every financial thing, and they’ve been saying things like, “Stocks fell today on concerns about the debt ceiling impasse. Treasury rates went down on concerns that the impasse would hurt the economy.”
Treasury rates have been really low lately, because even though in a lot of ways the U.S. is in bad shape, we have always had plenty of money to pay the interest on our debt, and we still do, and when countries around the world get into trouble, many investors stop loaning money to them and loan money to the U.S. It’s a safe hedge, and the more people that want it, the lower the interest rates go, but these investors would rather make low interest here than risk higher interest from a different country that might completely collapse and never pay them back. That’s why the 10-year Treasury rates have stayed around 3%, which is already historically low.
So the fact that today the rate has dropped even lower means that while investors may be concerned about the current situation or that some of the bills coming due in August may have trouble getting paid, they are not losing any faith in the ability of the government to pay long-term bills! They still view U.S. Treasuries as a safe haven, not only safer than bonds of other countries but even safer than stocks in the U.S. economy! (At least for now.) In fact, right now it looks like the debt ceiling crisis is lowering our government’s borrowing costs!
So some of the alarmists may have been correct that the markets would react negatively to a lack of a deal. We can no longer say, “Chill out, the stock market’s not even going down!” But I don’t think the alarmists can claim vindication here. We may not be able to cite low T-bills as “no reason to worry” at all, but the alarm was that U.S. borrowing costs would go up because T-bills won’t be low anymore, and that still has not happened. At least not yet.