Economic consequences of governance damage

<Economic consequences of governance damage>

U.S. Treasury yields have been soaring day after day. At the same time, the dollar has been strengthening and the exchange rate of other countries, including the won, has been weakening.

However, the interest rate on US corporate bonds does not rise as much as on government bonds. Even when interest rates on government bonds rise, the spread of speculative corporate bonds is steadily falling. This is very unusual given the status of government bonds that serve as the base rate for all bonds.

In the attached photo, U.S. Treasury yields and speculative corporate bond spreads move in the same direction until mid-2023. It's a move that fits conventional wisdom.

However, speculative-grade corporate bond spreads have been on the decline alone, even as U.S. government bonds fluctuate due to a large gap between the two after mid-2023.

Some warn that there is an excessive bubble in U.S. speculative corporate bonds and that the bubble will burst soon. This is a good warning to listen to.

However, if the gap between the two is due to the chronic malaise of the U.S. fiscal rather than the easy investment sentiment of the private corporate bond market, the story is different.

What great event happened in mid-2023 that broke the stable relationship between U.S. Treasury yields and corporate bond spreads?

On August 2, 2023, international credit rating agency Fitch downgraded the U.S. sovereign credit rating to AA+ from AAA. It was the first decline in 12 years. The market flipped.

Fitch pointed to "the erosion of national governance" as the main factor behind the credit rating decline at the time. The confrontation between Republican and Democratic parties has worsened day by day, raising concerns about the sustainability of the U.S. fiscal, with debt limit negotiations always reaching a dramatic conclusion only on the brink.

If much of the recent high rise in U.S. governance and fiscal crisis is due to the U.S. governance, we should not worry about the corporate bond rating bubble theory, but turn to the normalization of U.S. politics. Businesses are strong and healthy, but maybe the government is weak and fumbling?

High interest rates and high exchange rates are also causing tremendous difficulties for our economy. Persistent inflation is one of the reasons, but it is frustrating to see that US Treasury yields rarely fall due to the turbulence of US finances and governance failures.

Correct governance is so important to the economy.