If federal debt is so scary, why do people keep buying it? The panic I tried to spread over U.S. Treasury bonds earlier this month has gone nowhere. After breaking 4%, the yield on the 10-year Treasury has dropped to 3.49%, and with the Department of the Treasury not planning to borrow any new money this week, that puts at least a temporary kibosh on the claim that the market is losing its appetite for U.S. government debt.
The demand from both domestic and foreign market participants has been ridiculously high in all three tranches auctioned last week. Even the 7 Year Note—which is considered to be a bit of an odd duck—was oversubscribed to a record level and foreign Central Banks took the highest percentage ever for this particular maturity. World capital markets are highly interconnected. If the yields on Treasury bonds increase, that will cause funding costs to rise for the Russians, Chinese, Japanese, etc.—all those parties that are highly critical of the way the US continues to ramp up its borrowing needs. Officials in those countries are fully aware of that, so they continue to show up in size at all the Treasury auctions—which is really what matters at the end of the day.
If anybody can disambiguate me on why a rise in Oceania's bond yields would cause funding problems for central bankers in Eurasia and Eastasia (because it would lower the price of the bonds they have in their portfolios?), I'm all ears. It's also interesting that you can ease your worries about another party's excessive leverage by lending that party more money.
In any event, the U.S. Government is not having trouble selling its debt. If you traded all your greenbacks for gold, escudos or Mervyn's gift cards on the promise of mega- or giga-inflation, I apologize.
On the other hand, if you're a believer in bold, persistent experimentation with your great-grandchildren's tax revenues, this is good news. At the moment the Treasury is in the catbird seat. With gasoline the only thing going up in price, the government can continue to set new records in debt issuance (a new auction of 3-, 10- and 30-year notes will be held next week [pdf]), but not have to worry that it's unleashing inflation.
Things get more complicated, of course, when you want to unleash your inflation tiger but just can't get it up. The bridezilla above and the lazy slob to the left—who's apparently getting a COLA adjustment even though he can't be bothered to look at the nail he's hammering—come from The Story of Inflation, one of several fairly instructive comic books available from the New York Federal Reserve. You can order free copies here, and you'd better do it soon before the Obama Administration realizes they can realize $100 billion in deficit cutting by calling them "graphic novels" and selling them for $24.95. The Story of Inflation tries to be even-handed; you may prefer your pro-inflation propaganda in the more raw forms that were popular in a less thought-tormented age.