Treasury Note Yields

I've commented before that the huge Federal defects that we are piling up may eventually begin to spook the foreign investors who are loaning us the money to live to profligately. This week's Treasury Note auction was the third in a row to require higher than expected interest rates to lure buyers.

Buyers don't actually bid directly on the interest rates - they bid on the bonds themselves, which return their face value at maturity. In essence they bid in an auction to buy the bond at a discount from its face value. The lower the winning bid, the higher the effective interest rate is. As buyers get more worried about America's finances, it takes a larger and larger discount to attract bids.

The recent sharp rise in the effective rate (or, looked at another way, the increasing discount needed to sell new Fed notes) ought to be a warning signal to Congress and the administration to get serious about cutting the Federal defect, despite all the expensive new programs they would like to launch.

It's worth noting yet again that recent past empires, such as the British and Spanish empires, failed when they accumulated more foreign debt than they could manage. We are fast approaching that point ourselves, if we have not already reached it.