10. Bonds Are Dead (Long Live Bonds)
Clive CrookThe Atlantic
Investors in U.S. government bonds have had a fabulous run, and it’s over. For more than a decade before the Great Recession began, a surge of global saving increased the demand for Treasury bonds and raised their prices, delivering handsome capital gains. When the economy tanked, the government had to sell its bonds even faster to pay for its stimulus—and the price of its debt kept rising anyway. Investors saw U.S. bonds as a safe asset and demanded them all the more; the Federal Reserve started buying them too, in massive quantities, to keep interest rates low. So Treasury bonds delivered income and capital appreciation rivaling the historic return on equities—a much riskier asset.
It couldn’t last, and it hasn’t. By this spring, long-term interest rates had fallen so far that they had only one way to go. The exact opposite was true for bond prices. Whether you call this “the end of bonds,” as some market-watchers do, depends on your tolerance for hyperbole. Bonds aren’t going away. Balancing the budget will take time. Even the most zealous deficit-cutters foresee heavy borrowing for years to come. The government will have to keep selling its debt. The question is, how cheap will bonds have to be to persuade private lenders to buy—and will the Fed be willing, if necessary, to remain an investor itself?
For now, capital has no other safe haven, so private investors will think hard before shunning the market, and will likely settle for a moderate increase in yields. Certainly, the Fed would love to get out. But the U.S. is in the nice position of borrowing in its own currency—Greece and Portugal should be so lucky—so its central bank can always fund the government by “printing money” and buying the bonds itself. The more it does this, the greater the risk of high inflation later. Interest rates could soar in the meantime too, and that would depress physical investment—that is, spending on things like factories, machines, and roads. But the option of buying its own bonds is there, and having it is better than not having it. One way or another, this is not “the end of bonds.”