Over the past week, interest rates on the benchmark 10 year Treasury bond rose. Key drivers were: less safe haven demand for US government instruments (a “flight to quality” typically pushes down interest rates) and increased demand for US government instruments with higher yields, based on signs that the US economy is continuing to recover.
Economist Barry Eichengreen warned the U.S. over at VoxEU about the consequences of "economic mismanagement"--essentially, not taking steps to address the budget gap. Focusing on the international economy and the role of the dollar, Eichengreen says that a fiscal crisis in the U.S. would make the dollar "tank" and that "the impact on the international system would not be pretty." Here's what he had to say:
Wall Street banks have been drastically cutting their holdings of U.S. Treasuries, according to Bloomberg News. According to most analysts, this is a reaction to expectations of a stronger economy, which is leading banks to invest more heavily in private equities as opposed to Government bonds. While this is certainly good news, it does highlight the risk that U.S.
Nearing the end of the week, markets are still wrestling with the same cross-currents they faced last week, but with a new wrinkle - Spain.
The growth play: With most forecasters sticking to their stronger near-term growth forecasts since the tax cut deal was announced, traders have continued to rebalance portfolios away from bonds and into stocks. Still, growth is not expected to be strong and data has continued to be mixed.
What a week it’s been. Just look at the ups and downs of the yield on the benchmark 10-year Treasury note.
Of particular interest for us, Fed Chairman Bernanke noted the following in his speech today on “Rebalancing the Global Economy” at the European Central Bank’s conference in Germany:
“For their part, deficit countries need to do more over time to narrow the gap between investment and national saving. In the United States, putting fiscal policy on a sustainable path is a critical step toward increasing national saving in the longer term.”
Ireland, under attack by financial markets for its economic, financial and fiscal problems, may be getting assistance from the international community. Top IMF and EU experts have been dispatched to Dublin and are expected to offer a “very substantial” support package of “tens of billions” of euros to the Irish government, according to the head of Ireland’s central bank. Ireland, it appears, is on the verge of being given additional resources by the International Monetary Fund and EU institutions so that it can continue to get its fiscal house in order.
Domestic and global financial markets are being driven by major cross-currents once again.
On the home front, dust is still settling in the markets from the Fed’s announcement last week that it would launch its second round of quantitative easing (QE2, its purchase of large amounts of government debt to stimulate the economy). Earlier this week, the New York Fed announced its QE2 purchase plans for the near future: the Fed plans to be in the markets nearly every day. Stay tuned.
As taxpayers, politicians, journalists and wonks grapple with the wide-ranging fiscal plan launched by the chairmen of the President’s debt commission and the fiscal process recommendations issued by our own Peterson-Pew Commission on Budget Reform yesterday, we have gotten a message from the others side of the Pacific about how big the stakes are internationally – although the timing is coincidental.