Today’s extremely low interest rates on U.S. Treasury bonds reflect the widespread belief that they hold little risk. But recent research and analysis by Marc Joffe, a former Moody’s analyst, raises the possibility that bond markets are underestimating the risks involved in Treasuries — particularly over the longer term.
Diane Lim Rogers, chief economist for The Concord Coalition, discusses this issue in a new blog post and in a video with Joffe. She finds he makes a strong case.
Joffe notes that rating agencies do not rate public bonds using the same kinds of objective measures they use for private bonds. This, he argues, may understate the risks in Treasuries. He has developed a “Public Sector Credit Framework” designed to illustrate this possibility and, more generally, to raise public awareness of the national debt problem.
“Bond markets appear to be pricing Treasury debt as if it is risk-free,” Rogers writes. “However, if fiscal imbalances are not resolved, bondholders face the risk of losing value due to inflation and could suffer an outright default. While these risks are minimal in the short term, 30-year Treasury bond investors receiving sub-3 percent yields are not being compensated for the risks they are shouldering.”
Meanwhile, the situation simply encourages Washington policymakers to continue borrowing money to finance tax cuts and additional spending.
“But deficit financing is not free,” Rogers writes, “and under-valued risk via low interest rates is just as unsustainable as the path of rising debt.”
Public Sector Credit Framework