Wednesday, July 27, 2011

Tyler Cowen on a Very Important Keynesian Point

GMU's Tyler Cowen writes:
Observed low Treasury rates do not signal weak vigilantes...This is, in fact, a very Keynesian point. Spanning doesn’t hold. Markets aren’t complete. Low rates on Treasury securities are signaling fear, not safety. The price of gold, and Swiss francs, are very high right now.
This is a great observation by Cowen except for the fact that short-term rates are climbing, dramatically.

In early July, the 3 month Treasury was yielding as low as 0.01%. Yesterday, when Cowen wrote his post, the 3 month Treasury was yielding 0.07%, a 600% increase.

Clearly, the markets are very concerned about a short-term delay in interest payments. So is Cowen's Keynesian mumbo-jumbo as off as his reading of the direction of rates? It appears so.


  1. I am not sure I understand Tyler's logic. Perhaps you could better explain how low Treasury yields don't correlate to sleepy vigilantes.

    It would seem to me that if vigilantes viewed the US Gov't as bankrupt, (which they are regardless of whether the debt ceiling is raised) then they would short/sell bonds until yeilds more accurately matched that reality.

    May I offer another conclusion of bond trader's actions: They could be short the dollar and long treasuries for a short term pair trade. This would seem to make sense as the dollar has been in decline while treasuries have been trading higher over the past 6 months. The logic of this trade is that the Gov't/Fed will do everything in its power to keep rates low at the expense of the dollar. Intuitively, this trade doesn't make sense long term as the dollar and treasuries ultimately share the same fate. As the dollar loses purchasing power the bonds that are denominated in dollars will ultimately lose value as well. However, the lag in inflation can make this trade profitable in the short term.

    Just a thought trying to make sense of this crazy market.

  2. "Just a thought trying to make sense of this crazy market."

    Exercise in futility. Who knows what crazy scheme, or lurking "black swan", is going to come next. The Bernank WILL print money to mitigate the coming crisis, but who knows what other effects his actions will have.

    Long physical gold is the only sensible trade at this point.

    The bond market FINALLY started reacting today to the chance that the debt ceiling won't be raised in time, and pricing in a "soft" default and consequent downgrade by the (bankster owned) ratings agencies.