The Economist - USA (2020-11-07)

62 TheEconomistNovember 7th 2020

1

T

he treasurymarket has long been able

to strike fear into the hearts of the pow-

erful. Frustrated by worries in the 1990s

that bond yields would spike if Bill Clinton,

then America’s president, pushed through

economic stimulus, James Carville, his ad-

viser, joked that he wanted to be reincar-

nated as the bond market, because “you

can intimidate everybody”.

In the quarter-century since then, Trea-

suries have only become more pivotal to

the world’s financial system. The stock of

tradable bonds amounts to $20.5trn, and is

expected to approach 100% of America’s

gdpthis year, roughly double the share in

the 1990s (see chart). The dollar’s domi-

nance means that everyone holds them,

from American banks and European pen-

sion schemes to Arab sovereign-wealth

funds and Asian exporters. The yield on

Treasuries is known as the “risk-free” in-

terest rate, and underpins the value of ev-

ery other asset, from stocks to mortgages.

In times of stress investors sell racier assets

and pile into Treasuries.

As The Economistwent to press the out-

come of America’s presidential election

was still unknown, but the likelihood of a

Biden presidency and a Republican-con-

trolled Senate was rising. The yield on ten-

year Treasuries fell by 0.12 percentage

points to 0.78% on November 4th, perhaps

on expectations that government spending

will be stingier than if a blue Democratic

wave had swept over Congress. Still, the

next president may find himself worrying

about the bond market—not because of the

vigilantes that annoyed Mr Carville, but be-

cause of the risk of a snarl-up in the bond

market’s plumbing, just as the scale of gov-

ernment borrowing rises sharply.

On October 14th Randal Quarles, the

Federal Reserve’s regulatory boss, said that

the Treasury market’s expansion over the

past decade “may have outpaced the ability

of the private-market infrastructure to

kind of support stress of any sort”. His com-

ments were prompted by the fear of a re-

peat of the extreme stresses in March and

Treasuries

The bonds that bind

NEW YORK

Why the bond market might keep America’s next president up at night

Debt toll

United States

Sources:CongressionalBudgetOffice;Bloomberg

200

150

100

50

0

1900 50 2000 50

Net federal debt

%ofGDP

F’CAST

Covid-19

pandemic

GreatDepression

WW1 WW2 GreatRecession

400

300

200

100

0

2015 16 17 18 19 20

Measures of bond-market disruption

November6th2015=100

ImpliedTreasuryinterest-

ratevolatility†

Municipalbond-yieldpremium*

*Ten-year bond, premium against equivalent Treasury yields †MOVE index

Finance & economics

63 Buttonwood:Thesturdydollar

64 Ant’sinterruptedIPO

65 Theeconomicrecovery,shut down

65 Lebanon’sPonzischeme

67 Free exchange: Import substitution

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