The man the US has put in charge of marketing US debt to the Chinese is fittingly named, David Dollar. Mr. Dollar, addressing a group of economic policy makers at the World Economic Forum in China last month said, “The interest rate on long-term treasury bonds is at a very low level by historical standards.” “That says that the market has confidence the U.S. will get the fiscal problem under control.” While a sub 3.5% yield on the ten-year can be construed as a vote of confidence in the US, a deeper dive into the numbers tells a substantially different and troubling story.
In the last few years leading up to our financial crisis, foreign appetite has been strong for 3 types of securities: US Treasuries, US Agency bonds (i.e. bonds issued to fund Fannie Mae, Freddie Mac, etc.), and mortgage backed securities (MBS) (guaranteed...