Interesting musing from John Carney follows from a post of his refereeing the contretemps between Niall Ferguson and Paul Krugman:
We’ve broken the credit markets. Where once we could learn a lot about investor sentiment and expectations from the credit markets—including the markets for treasuries—the signaling function now is by and large useless. That’s because there are now way too many debt instruments that are the functional equivalent of treasuries. We have a lot of bank debt floating around that is backed by the FDIC explicitly, for example. And even the new debt that banks are issuing without explicit government guarantees is backed by a semi-explicit guarantee voiced by politicians who have promised “no more Lehmans.” In other words, every large, complex systemically important financial institution is a government sponsored entity these days. Why buy treasuries when you get a better return from bank debt that is just as safe? In short, the short term fluctuations in treasury yields now result from way more factors than they once did, and the signals about market expectations they through off are far less transparent.
Thoughts? Agree? It’s a thought-provoking take.