By Steven K. Beckner
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke said
Wednesday that Treasury bond yields are low because of slow growth and
inflation expectations, as well as overseas problems that make
Treasuries attractive to foreign investors, adding that they could go
lower yet if the economy weakens furthers.
On the other hand, he hinted, yields could jump if and when bond
markets become more focused on the size of the federal budget deficit.
Replying to questions from members of the Senate Banking Committee
after presenting the Fed’s semi-annual Monetary Policy Report to
Congress, Bernanke made clear he is not eager to see action to cut the
deficit in the near-term.
Explaining why the yield on the 10-year Treasury note is below 3%,
Bernanke cited “low inflation expectations, low growth expectations and
safe haven effects.”
Treasuries are a “safe, liquid investment,” and foreign governments
“want to hold dollar reserves.”
What’s more, he said, “the bond market is not focused on long-term
deficits.”
Were there to be a serious slowdown “presumably yields would fall
further,” he said, but added, “I don’t think a double dip is a high
probability.”
Bernanke said that if the ratio of the budget deficit to GDP is in
the range of 4-7% by 2013, as projected, and if the economy is then back
to full employment, “that’s too high. It’s going to lead to an
unsustainable situation.”
He said the deficit to GDP ratio needs to be no higher than the
rate of interest the government must pay on its debt.
But Bernanke said he “would much prefer to see consolidation or
cuts over the medium term rather than immediately.”
Bernanke agreed with allegations that China is continuing to keep
its currency the yuan undervalued. He cited estimates that the
undervaluation ranges from 10% to 30% and said that would tend to
underprice Chinese exports by roughly the same amount.
** Market News International Washington Bureau: 202-371-2121 **
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