Look Before You Leap

"Italy isn’t Greece. Greek debt is just under $400 billion, while Italy has $1.7 trillion. And yields on Italian debt are soaring, so that debt load is about surge along side."
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The True Message of the Bond Market

Isn't it remarkable how complacent bond market investors are about the chances of a default on U.S. debt. In fact, there are many reasons why the yield on the Ten year note should be trading at yields much higher than what we see today, over and above the specter of Congress failing to raise the debt ceiling.

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Psychology of Bond Investors

We argue that as the United States takes on ever more debt and prints greater quantities of dollars, that buyers of our debt will demand higher rates of interest to compensate for greater risk.  In fact, our philosophy leads us to believe that rates would currently be spiking as Washington debates whether to raise the debt ceiling yet again or default on existing debt. Instead, rates are hitting close to multi-year lows. As a result, our critics have found a seemingly valid issue. However, we believe that there are strong market reasons that are holding rates low for now that do not invalidate our central thesis.
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