No sign of bond vigilantes, despite soaring U.S. deficit estimates

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The long-term outlook for the federal budget deficit has worsened dramatically, the Obama administration conceded today.

But in the short run, investors’ appetite for U.S. Treasury debt shows no sign of waning. If Uncle Sam is addicted to red ink he still has plenty of enablers around the globe.


The Treasury easily sold $42 billion of new two-year notes today at a yield of 1.12%, about what the market was anticipating.

The government got $2.68 in bids for every $1 of notes offered, down slightly from $2.75 in bids at the last two-year note auction, on July 28.

Indirect bidders, a category that includes foreign central banks, bought 49.4% of the notes, up from 33% at the late-July auction.

The government is on track to run a deficit of $1.58 trillion in the current fiscal year, the White House Office of Management and Budget said today. That is $262 billion less than previously forecast, mainly because of smaller-than-expected outlays for the financial-system rescue.

But OMB added $2 trillion to its deficit forecast for the next 10 years, raising the total to $9.05 trillion, in part because of rising unemployment-benefit costs and other outlays stemming from what is expected to be prolonged economic weakness.

The White House continues to pledge that it will find a way to rein-in borrowing. ‘Getting the out-year deficit under control is a top priority of the administration,’ OMB Director Peter R. Orszag said today.


But as long as the Treasury has no trouble borrowing at relatively low interest rates, what real incentive is there to control spending?

In spring there was talk of the return of the ‘bond vigilantes’ of the 1980s and 1990s -- meaning that investors would demand ever-higher yields on Treasuries to discipline the government.

Yet yields on most longer-term Treasury securities are lower today than they were at the end of May, even as the economy has shown signs of recovery. The 10-year T-note yield is at 3.45% today, down from 3.74% on May 27.

The Treasury’s debt auctions this week will continue with the sale of $39 billion in five-year notes on Wednesday and $28 billion in seven-year notes on Thursday.

-- Tom Petruno

The Treasury building in Washington. Credit: Chip Somodevilla / Getty Images