Treasury Wants More Credit

Foreign investors have played a big part in keeping rates low with their continuing purchases of U.S. debt. That's because on a pure risk/reward basis there's nowhere else for foreign investors to get the yield of a Treasury with such limited downside.

"Our fiscal situation is less problematic than that in Japan or Western Europe, where deficits are much higher and the demographic problems are more acute," says Michael Darda, chief economist with MKM Partners.

"This is probably one of the best environments for borrowing in recent or distant memory ... but Congress still needs to get the purse strings under control," Darda says, if for no other reason than because Social Security and Medicare are becoming unavoidable issues as the nation's baby boomers retire en masse.

Darda also believes that the long-term fundamentals for the Treasury market are "terrible" because the global demand that has kept U.S. yields low will eventually ebb to normal levels over time.

Matthew J. Smith, vice president of Smith Affiliated Capital, an investment advisory firm specializing in fixed-income portfolios, says that while no other country has the breadth and depth of the U.S. Treasury market, "no country before in history has maintained its economic superpower status with twin deficits."

Even though the current environment allows the government to issue near limitless paper without losing buyers, the uncertainty of being an indebted nation still has an impact.

The Treasury has taken its first steps to keep the auctions rolling. On Wednesday, it suspended sales of state and local government series nonmarketable securities. The next day, it suspended investments in the government pension plan, and that will free up almost $65.27 billion, McLaughlin says.

Other steps the Treasury could take as it waits for the new limit include diverting funds from Social Security, withholding interest payments to government funds or issuing debt through the Federal Financing Bank, which isn't subject to the debt limit.

And the costs of a nonfunded government could directly effect government jobs if the Treasury, as a last resort, needs to temporarily lay off workers to elude the limit.

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