The U.S. is not a riskier bet than China
Illustration: Lazaro Gamio/Axios
It's certainly a striking headline: "Markets Conclude the U.S. Is Riskier Than China." And the author should know whereof he speaks: Matthew Winkler, the editor-in-chief emeritus of Bloomberg News, literally wrote the book on how to report on markets.
But Winkler is wrong. (And/or he has created "an unintentional Sokal Hoax for finance.") Contra Winkler's assertion, the U.S. Treasury does not have to "pay a premium over Chinese bonds to attract investors." To see that, just compare the two countries' bond yields. China sometimes borrows in dollars, so we can compare apples to apples. And the evidence is clear: At every maturity, China pays more than the U.S. does.
- A bond maturing in 2022 yields 3.1%, or 33bp over Treasuries.
- A bond maturing in 2023 yields 3.3%, or 50bp over Treasuries.
- A bond maturing in 2027 yields 3.5%, or 62bp over Treasuries.
- A bond maturing in 2028 yields 3.6%, or 72bp over Treasuries.
- A bond maturing in 2048 yields 4.1%, or 96bp over Treasuries.
Winkler is comparing domestic-currency interest rates; he concludes that there's a "dichotomy between the U.S and China in the credit markets." But in doing so he ignores the fact that he's comparing two entirely different currencies. He also makes two category errors.
- These numbers aren't about credit. Countries that issue debt in their own currency, like China and the U.S., can always print money to repay that debt. Local-currency bond yields, by definition, are rates, not credit.
- There is no correlation between interest rates and riskiness. Italy is a risky country, but the yield on its 1-year notes is only 0.3%. U.K. 1-year bonds, at the height of Brexit chaos, yield 0.8%. Meanwhile, the U.S., which remains the global hegemon and the safest haven in the world, has a 1-year risk-free rate of 2.7%.
Be smart: Local government-bond interest rates are mostly a function of domestic monetary policy and inflation expectations; they tell you next to nothing about a country's creditworthiness. Neither do they indicate anything about endogenous economic risk.