The Corner

Government Bonds Aren’t Always the Safest

Yesterday morning, Senator Jeff Sessions’s office circulated a chart showing that government debt per capita in the U.S. is greater than it is in Greece and other European welfare states such as Spain and Italy. I have mentioned before that IMF data shows that the U.S. government’s financing needs are “exceptionally high” and higher than any other country with the exception of Japan. In 2010, the United States, for instance, needed to sell debt equivalent to 32 percent of GDP in order to rollover maturing debt (21 percent of GDP) and cover new deficits (11 percent of GDP).

These data, while scary, don’t tell us very much about how close the United States is to being in gigantic trouble. I mean, we know our prospects are grim, but no one can seriously say when investors will only lend to the U.S. in exchange for exorbitant interest rates or will refuse to lend to Washington at all. That’s because there is more that goes into investors’ decisions about a country’s debt than just the level of its debt burden. In fact, we know that investors rate countries on a curve. In other words, as long as the U.S. looks like a better “investment” than EU nations or China, things are unlikely to go terribly wrong — at least for a while. 

But things could change. In fact, some things are already changing. It may seem minor, but the Wall Street Journal had a story about how the Greek-government-debt restructuring is exposing the fact that investors today perceive government bonds (including U.S.-government bonds) to be riskier than they were in the past, and, in some ways, riskier than corporate bonds.

As you can see, U.S.-government bonds continue to be perceived as less risky than other government bonds, yet it’s also unprecedented in history for it to be more expensive to insure against the risk associated with holding U.S. debt than IBM corporate bonds. These are unusual times.

Finally, it would be a terrible mistake to assume that, because rates are low for now, they will stay at these levels. For more on this, read this symposium on the potential of a U.S. default put together by the Mercatus Center and the Econ Journal Watch.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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