Via Ezra Klein, more on why the end of quantitative easing is bad for treasury prices:
The dominant view among liberals is that the low, low yields on Treasurys reflect the market’s serene confidence that America will make good on its debts. But some of the investors and economists I spoke to while reporting out my piece on the debt ceiling disagreed.
PIMCO’s Bill Gross and former-Reagan budget director David Stockman both think Treasurys look safer than they are because the central bank, as part of quantitative easing, is buying up so many of them. “There’s a terrible mispricing of the potential negative aspects of this debt situation,” Gross says. “When the Federal Reserve gets out of the Treasury market on June 30th, the question becomes who will buy them at these yields, and I don’t know who would.” Gross, incidentally, has put his money where his mouth is by making a big and very public play against Treasurys.
But he’s not alone. Stockman, for instance, is even blunter. “It’s a hothouse, an artificially rigged market,” he says. And once the Fed exits, “there’s nothing to keep it from collapsing.” Stockman worries that people are underestimating the capacity of investors to wake up to the mispricing and exploit it. “It shouldn’t be underestimated that once the smart investors figured out that the subprime and housing mortgage market was busted, they went after it hammer and tong brought about a dramatic change in pricing in 12 months. If they start that on Treasurys, you’ll have a different world a year from now.”
The Federal Reserve disagrees with them. Otherwise, they wouldn’t be exiting the market in June. They point to the end of the first round of quantitative easing, when they backed out of the market and private demand rushed into replace their purchasing, keeping yields low. They think that’ll happen this time, too. We’ll know who’s right soon enough.
Via Paul Krugman, more on why the S&P “Downgrade” doesn’t matter:
I continue to be amazed by how much attention and credence is being given to the S&P “warning” on US debt. I mean, this was supposedly a warning about the safety of US debt. So if it mattered, we should have seen a jump in interest rates on April 18, the day of the announcement. Um, here’s the 10-year bond rate:
People, this was a non-event.
Joe Weisenthal at Business Insider sees some symbolism:
It’s official. The bond market is holding up a gigantic middle finger to the market, as Treasuries across the board are now HIGHER post S&P downgrade of the US debt outlook.
The 30-year had fallen the farthest, so it’s comeback is breathtaking.
Of course the kiddie market, stocks, are still down.
In fact, within 24 hours the equity market has nearly bounced back, further indicating yesterday’s turmoil was caused by panic instead of a rational reaction to new news:
Via Ezra Klein, Democrats and Republicans use this news to continue to be dysfunctional:
Democrats think S&P’s announcement proves them right. Republicans think S&P’s announcement proves them right. Felicia Sonmez reports: “Republicans argued that the news illustrates the gravity of the country’s debt crisis and the need for any debt ceiling vote to be accompanied by a plan to tackle the country’s longer-term fiscal problems…Meanwhile, a group of more than 100 House Democrats led by Rep. Peter Welch (D-Vt.) on Monday reiterated its call for a “clean” debt limit vote, or a vote with no conditions attached. In a statement, Welch contended that the New York Stock Exchange’s sharp drop in reaction to the Standard Poor’s ratings change Monday morning could be a harbinger of worse things to come if a political showdown on the debt limit raises doubts about whether the country will fulfill its financial obligations.”
In summary, [if it mattered], does S&P’s decision mean we have too much debt, or that we need to raise the debt ceiling? I won’t go there.
Via Barry Ritholtz, more on why S&P doesn’t matter and why Bill Gross does:
What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.
First, I have stopped paying any attention to anything that S.&P. says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.
But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.
Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Clinton and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.
After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S.&P.
The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it why I never care what S.&P. thinks on this.
Ezra Klein explains where the deficit came from in the first place:
I find that some of my conservative readers take great offense when I bring up the continued contribution that policies like the Bush tax cuts or the Medicare Prescription Drug Benefit are making to the deficit. They think it’s a partisan point, or that I’m blaming Republicans for the debt accumulated while Obama has been in charge. But it’s really not. It’s just the situation we’re in, and it needs to be described accurately.
Our current tax rates are historically low, and have made a major contribution to the deficit. Revenues have to be part of any solution — and I still think Obama is ducking reality when he proposes to make most of the Bush tax cuts permanent. Meanwhile, we need to raise the debt ceiling because of the combined impact of a large number of policies passed over many previous congresses. This isn’t something either party can duck, or hold hostage.
And finally, via BusinessWeek, a graphic on historical debt ceilings (click for larger image):
Ok, I’m done!