Last week, in three separate auctions, the U.S. Treasury offered up more government debt for sale than ever before — $104 billion dollars worth of notes and bonds. Given all the anxiety expressed in recent months about how the bond market was trembling in fear at President Obama’s big budget deficits and the prospects of high inflation down the road, you would be excused for thinking that such a massive offering would cause even more dismay.
But no. All three auctions witnessed strong demand from buyers — especially so from foreign investors who already own over 50 percent of all U.S. government debt.
Bonds rallied last week as indirect bidders, a class of investors that includes foreign central banks, purchased 67.2 percent of the record $27 billion in seven-year notes sold on June 25, or double the amount of bids than at the last sale in May. The ratio was also the highest since 2004 on the sale of a $37 billion in five-year notes the day before, while the $40 billion in two-year notes auctioned on June 23 attracted the most indirect bids in at least six years.
When the U.S. government offers a record amount of debt for sale in a single week, and the world responds with alacrity to snap it up, we learn two things. One: the global economy is in such bad shape that the dollar is still where investors want to park their money, as the safest bet in uncertain times. And two: Right now is not the time to try to make political hay about the the threat of inflation.
And yet, it continues. Citing a spike in yields for ten-year Treasury bonds registered earlier this month, Martin Feldstein, the Harvard economist and former Reagan economic adviser, told us in a column in the Financial Times on Sunday that “higher higher long-term interest rates reflect investors’ concern about future inflation, future fiscal deficits and the future willingness of foreign investors to purchase US bonds.”
Therefore, he concludes, “The fiscal deficit should therefore be reduced by curtailing the increases in social spending that the president advocated in his election campaign.”
What do you think? Does it weaken or strengthen Feldstein’s argument that he chose to make his recommendation right after the U.S. government easily raised the most cash in one week ever?