One might think so, given the huge increase in federal spending, and the likelihood that the govt will sell bonds and/or print money to pay for it.
Yet the govt bond market remains strong*. Why?
I think there are several possibilities:
-Our economy will recover quickly enough for the money-supply expansion to be absorbed by economic growth without a big increase in the price level; we will grow our way out of debt.
-Today’s bond buyers and traders are too young to remember the 1970s; the bond market will crash eventually.
-Even considering the risks, US govt bonds remain the best place to park money until investors have better alternatives.
-Investors are playing a hot-potato game: holding govt bonds now is like keeping money in Mexican banks before a peso devaluation. Investors trade high returns (price appreciation for bonds, high interest rates on non-dollar bank deposits) against the risk of substantial capital loss in the event of a bond crash or currency devaluation.
Only time will tell what the answer is. Perhaps it will be “all of the above.”
*I started writing this post a few days ago. Govt bond markets, particularly the Japanese market, have weakened since then.