Paul Krugman thinks that rising yields for Treasuries signal a warming economy. Niall Ferguson and other “declinists” think they anticipate inflation. John Carney offers a third possibility:
we’ve broken the credit markets. Where once we could learn a lot about investor sentiment and expectations from the credit markets—including the markets for treasuries—the signaling function now is by and large useless. That’s because there are now way too many debt instruments that are the functional equivalent of treasuries. We have a lot of bank debt floating around that is backed by the FDIC explicitly, for example. And even the new debt that banks are issuing without explicit government guarantees is backed by a semi-explicit guarantee voiced by politicians who have promised “no more Lehmans.” In other words, every large, complex systemically important financial institution is a government sponsored entity these days. Why buy treasuries when you get a better return from bank debt that is just as safe?
Why buy treasuries when you get a better return from bank debt that is just as safe? “
Except, since the Chrysler bankruptcy, you can’t be sure ANY bond is safe. By destroying the hierarchy of debt, the Obama administration has increased the risk to bond holders that their interests will be sacrificed to political ends, despite black-letter law stating otherwise.