TYBS - The Mystery Of The Miniscule
Editor's note: This article was originally published on February 13, 2019, by Menzie Chinn here.
The Federal budget has just had a big hole blown in it. Thanks to the Tax Cuts and Jobs Act and the last omnibus spending bill, both the Fed and foreigners (including central banks) are no longer adding to their holdings of Treasurys.
First, consider that when structural (cyclically adjusted) budget deficits rise, often spreads rise. But not this time around.
Figure 1: 10 year-3 month Treasury spread (blue), structural budget deficit as a share of potential GDP