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In the very short term, demand remains a problem, and markets are practically begging for more safe debt to hold.
(I quoted the relevant passages in the post linked to above).Similarly, a working paper by Arvind Krishnamurthy and Annette Vissing-Jorgensen shows, through careful empirical study, that financial firms will create risky "safe" debt when the government does not create genuinely safe debt.
The key components of "safe" debt include bank deposits, money market mutual fund shares, commercial paper, federal funds and repurchase agreements ("repo"), short-term interbank loans, Treasuries, agency debt, municipal bonds, securitized debt, and high-grade financial-sector corporate debt.
The fund then takes its cash and buys something similar to the assets it sold: highly rated mortgage-backed securities or corporates, for instance, or the safe debt of foreign governments.
This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a "full faith and credit" pledge.
And here is the rub, a version of the Triffin dilemma: if those countries begin pursuing austerity they will restrict the supply of new, safe debt, thereby exacerbating the safe-asset shortage.
Similar(51)
Many want to buy only the safest debt.
Investors would look at the rating, know what they were getting and pay more for the safer debt.
Yields on Germany's benchmark 10-year bond, viewed as the euro zone's safest debt, hit a record low of 1.628 percent Monday.
The move away from the dollar is partially a symptom of problems in the credit markets, which have left investors wary of even the safest debt.
Treasuries posted their biggest gains yesterday since December 2004 as a rout in global stocks and bonds bolstered demand for what is regarded as the safest debt.
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