from a canadian econ blog:
The world wants more US government debt. The US Treasury should supply it. — This fascinating story came out during the psychodrama of the US debt ceiling: U.S. Treasury debt prices soared on Friday on fears a U.S. default could trigger a shortage of Treasuries and even push the world’s largest economy back into recession. On the face of it, this makes no sense. The market’s reaction to a higher perceived probability that the US would default on its debt was to demand more US debt? If the markets behaved this way with Greece, there’d be no Eurozone debt crisis. But of course, the US isn’t Greece; US debt is special: The potential that the Treasury might postpone debt sales in the event the debt ceiling is not extended by next Tuesday bolstered Treasuries on concerns fund managers and short-term traders might have to compete for tight supply for their everyday operations. “There’s a lot of demand for these issues, just kind of a natural demand that always comes up,” . “So with less or truncated supply you have a lot more demand chasing less supply.” So long as investors want to shift to liquid assets during episodes of uncertainty and so long as US Treasuries are perceived as being among the most liquid assets, then there’s going to be a strong demand for them. And if the only way to acquire US debt is to acquire USD, then we’ll also see a pattern of USD appreciating on bad news – even if the bad news is about the US economy.