Minyan Mailbag - Long Bonds
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
I have trouble understanding how our ever-increasing trade deficit, and federal deficits, results in progressively lower yields on long bonds. It seems that as a nation that we would need to borrow more funds (and lend at higher rates). I obviously am missing something.
As stats worsen, it puts pressure on the dollar. Normally foreign
lenders would demand higher rates for their currency losses. It is clear
that the Japanese are not responding (currently) in this fashion. They
respond by buying more of our debt to recycle dollar liquidity in a
desperate attempt to support their "investments" and keep their own
currency weak. It allows the cycle of Japanese financing of U.S.
consumption and Chinese production to continue.
We have no idea when or if the Japanese will respond at some point in a rational way to the ever increasing public and consumer debt in the U.S. that this creates. Brian has commented continuously on the effects of the process on credit spreads and thus equities where I have commented on the resulting effects to our financial infrastructure and risk.
We are both left guessing as to when these effects "snap" back as markets more correctly assess the risks.
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