The U.S. economy is still by far the world’s biggest, and as a borrower, the U.S. government is still rated as one of the world’s safest. But something weird is happening in the U.S. government bond market, and Randall Forsyth at Barron’s, for one, is concerned.
I was taught that you should worry when what’s called the ‘yield curve’ on the bond market inverts, or goes negative. That means the yields on longer term bonds are lower than the yields on short term bonds, which means that people expect yields to fall. But that’s not happening — in fact the yield curve has almost never been steeper.
Some economists say that means a recovery is coming, but Forsyth isn’t so sure. He’s concerned because as the news gets worse and worse, the curve is getting steeper and steeper.
At the same time, the cost of insurance against the possibility that the U.S. Treasury could default is getting more and more expensive. That seems to indicate that the market believes that the Treasury could indeed fail to meet its debt obligations.
So could the U.S. actually go bankrupt? You never know. As Forsyth notes, you start borrowing a trillion here, and a trillion there, and pretty soon you’re talking about real money.