1. U.S. Treasury-note rate drops to 66-year low - USATODAY.com http://www.usatoday.com/USCP/PNI/Business/2012-05-31-APUSCredit...
U.S. Treasury-note rate drops to 66-year low
By Matthew Craft, Associated Press Posted 4d 15h ago
NEW YORK — NEW YORK The drop in a key interest rate to a 66-year low is a sign of
one thing: fear.
Traders don't actually think a Treasury note paying 1.62
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not a lot of competition," said Bill O'Donnell, head of U.S.
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The benchmark 10-year Treasury note fell Wednesday to
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its lowest level since November 1945 as worries about
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Investors sold off stocks and plowed money into
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The search for hiding places was spurred by news out of
Spain, the latest trouble spot in Europe's debt crisis. The
European Central Bank said Spaniards pulled billions in deposits out of their banks last
month, raising concerns of a larger bank run.
The yield on the 10-year Treasury dropped to 1.62 percent, a steep drop from 1.74
percent late Tuesday. Rising demand for bonds pushes their yields lower.
When banks or big investors get frightened, their concern is no longer about making more
money, O'Donnell said. They just want to avoid losing it. That's why traders on
Wednesday bought German government two-year notes paying 0 percent, he said.
They're simply handing their money over for safekeeping.
"People still have faith that they'll get their money back from the U.S. government," said Ira
Jersey, U.S. interest-rate strategist at Credit Suisse.
For the federal government, that trust means it can borrow at rock-bottom rates even as
debts pile higher. Total federal debt now sits at a record $15.7trillion. But it cost the
government more to borrow when debts were lower. The 10-year yield has averaged 4.7
percent over the past 20 years.
The trend of higher debts and lower rates runs counter to an argument often heard in
Washington. Certain Republicans often argue that rising federal debts will turn the U.S.
into another Greece. Greece's shrinking economy and deep debts have pushed the
unemployment rate to 21.7 percent and 10-year interest rates to 26 percent.
But the workings of the U.S. government bond market often break the economic law of
supply and demand. Treasuries have plenty of unique advantages, including the world's
biggest buyers, foreign central banks that don't play the stock market but need a safe
place to stash money.
Size matters, too. The U.S. economy remains the world's largest, which means there's
commerce to be taxed, O'Donnell said. If needed, the government could raise money by
eliminating deductions, closing loopholes and adopting other reforms.
"With a few strokes of the pen, we could get our debts down by paying our taxes," he said.
"There's something to tax, unlike other countries."
At $11 trillion, the U.S. government bond market dwarfs those of other countries, which
makes Treasuries the easiest security to buy and sell in a hurry. Daily trading of
Treasuries runs at $523 billion, roughly 17 times higher than trading in German bunds.
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