Should We Thank Geithner For Cheap Treasuries?

Over on Bloomberg there's a piece today celebrating the extremely low spreads on the latest U.S. Treasury bond sales. It praises Treasury Secretary Timothy Geithner. According to the article, the low Treasury prices are a testament to how well Geithner has been doing. I think he's has been doing a fine job, but Treasury prices have little to do with his performance.

Here's Bloomberg's praise:

Rising demand shows investors believe Geithner, 48, is striking a balance between policies to promote growth and the borrowing needed to finance a $1 trillion deficit.

And one source agrees:

"There have been many criticisms of him, but he's done a good job," said Tsutomu Komiya, who invests in Treasuries for Tokyo-based Daiwa Asset Management Co., which oversees $77 billion. "He brought stability to the financial markets. We can't help but invest in Treasuries because of their safety and liquidity."

For starters, that second statement isn't really true. Which one of Geithner's policies brought stability? At best, you could say the bank stress tests helped. But I don't believe they helped because they made investors think banks were really healthy. Instead, investors likely believed that the government would feel obligated to stand behind those scores and bail out banks again if necessary.

In reality, the crisis was over by the time Geithner took the helm, leaving him just the deep recession to deal with. The Fed interventions and bank bailout calmed the market, and it strengthened with time since Geithner did not reverse course. Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson were the responsible parties there, not Geithner.

Geithner's major contributions up to now include those stress tests, the public-private investment fund -- which hasn't really gotten off the ground, and the homeowner bailout -- which has had only minor success in preventing foreclosures. But don't get me wrong: I don't think Geithner has done badly. I just don't think it's right to say that Treasury bonds' low price point has much to do with anything he did.

So what has caused low Treasury prices? Well, first investors are still seeking low-risk securities. Where else to they really have to turn? They could look to other sovereign debt, but the U.S. is still viewed as the safest market out there -- just ask any investors who made the mistake of buying Dubai's debt. I don't think anyone thinks there's a real chance of the U.S. defaulting on its debt, even with its high deficit.

Actually the popularity of Treasury bonds might signify a problem. Credit markets should be opening in the corporate unsecured and asset-backed secured bond markets to take some of that demand away from the government securities. But that must not be happening. Investors remain scared of broader credit markets and continue to show strong demand for safer Treasuries.