Reply to What would a US bond market crisis look like?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]Bond yields rise and dollar falls. Inflation increases. At that point it depends on the fiscal policy response. Higher yields increases government borrowing costs and hence the deficit. If they take credible action to contain the deficit then the situation stabilizes. If not we enter a negative spiral that involves the same elements of rising interest rates, spiraling deficits, falling dollar, increasing inflation etc.[/quote] This is  the theory, but present day reality is the opposite as far as bond yields go. Even w/ the “big beautiful bill” expected to add trillions to the total debt, rates are lower compared to Jan. 1. There is no panic in the bond market. Go figure. [/quote]

I suspect that it means that the market doesn’t think the bill will be passed as is. There is also some move to bonds as nervousness about equities persists. Look at how the cost of credit default swaps on US government debt have increased for evidence that all isn’t well in the bond market.

But I don’t disagree with you. The point is that it is an unstable equilibrium. Once things start moving, they could move quickly.[/quote] Rates have been a lot higher in the past, and no one thought that it was unstable. If you drew line through the middle of the 10yr over time, it would about 6-7%. No one thought that was unstable, and it has been even higher than that.

And there really is nothing to replace the US Treasury bond market, it’s to deep and trades 6 days a week all hours of the day. There is no bond market or currency on par w/ the US. No one is ever going to hold their wealth in Chinese bonds, and the EP countries are too small.

[/quote]

So debt dynamics are interesting. They are a function of the interest rate, the debt-to-gdp ratio, the inflation rate, the current deficit, and future deficits, as well as the global demand for US bonds. Moreover it is about perceptions of sustainability, not just the numbers. 15 percent might be sustainable when your nominal gdp growth rate is very high. But 7 percent would be unsustainable if your nominal growth rate is 5 percent and your fiscal policies are crazy (including potentially taxing foreign investors at high rates, as the current bill proposes).

I agree it would take a lot to dethrone the US bonds market. But this administration is brewing up the perfect storm of measures to do it. If they don’t, it will be because the Senate saves them.[/quote] So Dethrone in favor of what? That really is the question.

Also, Biden ran 2T deficit and no one cared, least of all the bond market.

I think this can go for a long time.[/quote]

at least another 50 years.[/quote]

Maybe. But to paraphrase Ernest Hemmingway, countries go bankrupt gradually, then suddenly. We are in the gradual stage. It is slow. The next stage will be very quick.[/quote]

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