Buyers of government debt seem more concerned with the near-term economic outlook than the deterioration in US federal finances predicted for the years ahead. Despite a week with $123bn of Treasury issuance, the 10-year yield has retreated from 3.58 per cent on Monday to 3.41 per cent Wednesday morning. For the largest ever auction of two year notes ($44bn) on Tuesday, dealers were surprised by a record level of direct demand. These are not investors expecting interest rates or inflation to rise any time soon.
They may have a point. US consumer confidence fell again in October, with the lack of jobs leading to the weakest assessment of current conditions in 26 years. The wide gap between actual and potential output as factories and businesses run well below capacity suggests little potential for upward pressure on prices and wages. Stimulus spending and quantitative easing have not started a new boom.
Meanwhile, foreign buyers show no sign of losing their appetite for Treasuries and a significant well of domestic demand for the securities remains untapped. Baby-boomers approaching retirement have been scarred twice in a decade by equities. Given such uncertainty, and amid the continued risk of prolonged stagnation, the attractions of a promise from the US government to return all your money remains.