Paul Krugman on the Bond Market

In his latest op-ed in the NY Times, Paul Krugman makes some worthwhile comments about the seriousness of persistent unemployment. However I was struck by this claim –

And, for what it’s worth, actual investors — people putting real money on the line — are notably unworried about any near-term fiscal crisis: the Treasury Department continues to have no trouble selling debt and remains able to borrow very cheaply, indicating high confidence on the part of investors that debts will be repaid in full.

This is interesting in light of a couple of facts that Professor Krugman did not mention –

  1. In late February, Pimco, the world’s largest bond investor, dumped all of it’s US Government debt holdings (Reuters). In March they went further and actually bet against government debt by shorting US$7Billion worth, i.e. by selling $7Billion of US Treasuries that they had borrowed – approximately 3% of their total bond fund (The Guardian).
  2. 70% of all new US Government debt is bought by… the US Federal Reserve (Seeking Alpha). Are these the “people putting real money on the line” Professor Krugman was referring to?
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