Fisher Investments Editorial Staff
Deficits, Media Hype/Myths

A Dose of Reality

By, 07/14/2009
Story Highlights:
  • US Treasuries saw demand reach record levels as two Chinese government debt auctions failed to attract enough buyers.
  • This ironic twist shows recent panicking over the US falling into a self-fueled chasm of bankruptcy—while China rises to the top—is off the mark. Still, China's failure to complete two bond auctions, in and of itself, doesn't mean anything.
  • This does highlight the US's financial situation is in much better shape than widely believed—particularly on a relative basis.

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Two countries. Two government bond auctions. One auction falling short of its subscription goal over fears of deficit-fueled inflation. If you were told the two countries were the US and China and nothing else, which country do you think investors left in the cold? Recent rhetorical jabs at US spending may make you think "US." But ironically, the answer's "China"—the source of much of that anti-dollar rhetoric.

There's nothing like irony to remind you sometimes reality bites. Despite voluble fears the US won't be able to fund its sizeable debt, bond investors snapped up US Treasuries in recent auctions, pushing demand to record levels. On the other hand, China—a vocal critic of the US dollar and US spending—failed to complete two government debt auctions last week for the first time in almost six years.

This ironic twist shows recent panicking over the US falling into a self-fueled chasm of bankruptcy—while China rises to the top—is off the mark. Still, China's failure to complete two bond auctions, in and of itself, doesn't mean much—fears its borrowing costs may rise as a result should be assuaged by the central bank's loose monetary policy, which will help keep bond yields down. China will still likely lead the world out of recession as its fiscal stimulus engine continues to fire on every imaginable cylinder.

These events further denote, first, the US's financial situation is in much better shape than widely believed—particularly on a relative basis. Second, it's more important to watch what people do and not listen to empty rhetoric. Talk, as they say, is cheap. People may pronounce the dollar done and US debt doomed, but they certainly can't seem to get enough of our greenback-denoted bonds.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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