JUDY WOODRUFF: With the prospect of the government hitting its debt limit looming, investors over the past two weeks have sold off billions of dollars worth of U.S. Treasury bills.
For a look at the dynamics behind the sell-off and what the potential effect on the larger economy could be, Paul Solman visited one of the country's largest bond trading companies. It's part of Paul's ongoing reporting Making Sense of financial news.
JAY CARNEY, White House Press Secretary: Good afternoon, ladies and gentlemen.
PAUL SOLMAN: The administration's latest warning today about the danger of debt default from spokesman Jay Carney.
JAY CARNEY: That has tremendous negative consequences for our economy, not all of which are knowable, beyond the fact that we know they're bad.
PAUL SOLMAN: Yesterday, the president himself sounded a more specific alarm.
PRESIDENT BARACK OBAMA: Defaulting would have a potentially devastating effect on our economy, sending interest rates shooting up.
PAUL SOLMAN: And hobbling the economy.
That's been the warning each time America has neared debt default in the past few years, that mortgages would soar, consumers and businesses be unable to borrow, the government forced to pay untold extra billions to borrow more money, if and when it can, plunging us deeper into debt.
So are the interest rates the U.S. Treasury has to pay to borrow money going up? This morning, we went to one of the world's largest dealers in treasuries, RBS in Stamford, Connecticut, to find out. And at first, the news wasn't good.
MICHELLE GIRARD, RBS: So, you guys, see, the House is saying this is going to be dead on arrival.
PAUL SOLMAN: Michelle Girard, chief market economist at RBS, alerting traders.
But next desk over, John Briggs, who advises clients on interest rates, said, not to worry.
JOHN BRIGGS, RBS: The bond market so far hasn't shown a lot of concern about debt ceiling.
PAUL SOLMAN: So, what has the interest rate on U.S. debt, on U.S. Treasury bond been in the last, I don't know, couple of weeks?
JOHN BRIGGS: So they fell from 3 percent to about 2.7 percent, which is a fairly modest decline.
PAUL SOLMAN: But that is still a decline, when the president is saying, oh, my goodness, if this happens, interest rates will shoot up.
JOHN BRIGGS: Correct.
PAUL SOLMAN: So what's going on?
MIT economist Simon Johnson tried to explain it to us.
SIMON JOHNSON, Peter G. Peterson Institute for International Economics: We have a very strange relationship with the world economy. When we scare people a lot, what they want to do, investors, is find something that's safe. The safest asset they can find is U.S. Treasury debt.
PAUL SOLMAN: But how could anything be riskier than a bond that the issuer says we're not going to pay, we will default?
SIMON JOHNSON: In the U.S., we have a long history of politicians saying many things that turn out not to be entirely accurate.
This is a game that they're playing. Will they, politicians, ultimately, the political system ultimately lead us to a point in which we default on those debts? Probably not. Will there be chaos along the way and damage to the economy? Yes.
PAUL SOLMAN: And, yes, damage to the economy was spooking not bonds, but the stock market this morning, said economist Girard.
MICHELLE GIRARD: Because, if the U.S. were to get into a situation where we were facing default, the economic consequences would be significant. We're talking very severe recession. Now that's an unlikely scenario. But that's exactly the kind of thing that rattles the stock market.
PAUL SOLMAN: And so stocks, after rallying for days, were down this morning. But are bond investors totally impervious to what's going on in D.C.? Not totally, said John Briggs.
JOHN BRIGGS: So there's a very short-term government security, a Treasury bill that matures on October 24.
PAUL SOLMAN: And that's this chart over here?
JOHN BRIGGS: Correct. It almost got down to almost zero. This is the government shutdown. And you can see that the closer we got to the debt ceiling and potential default, the more investors would demand in order to hold that security, because that is right in that window where, if we run out of cash, this is the first security that will not pay.
PAUL SOLMAN: Got it. And so that's a huge jump, from zero to -- what is that?
JOHN BRIGGS: Point-five percent, half-a-percent.
PAUL SOLMAN: And so this three-month Treasury bill, coming due in a week, is what bond market watchers are monitoring most closely right now.
And what's happened to it since? I see, red means it's falling, right?
JOHN BRIGGS: That reflects increased confidence that a deal is going to get done. We had news over the weekend that Reid and McConnell thought a deal would be coming possibly today. So we started to fall down into basically essentially 20 basis points from 50 a few days ago. But now we're rising again today, because the House Republicans seem to be saying they will shoot down this latest Senate bill.
PAUL SOLMAN: But, as it turns out, rising only slightly, to 22 basis points. It doesn't look like the bond market is terribly scared at the moment either.
JOHN BRIGGS: Not terribly scared, but as we get closer, if we do not have a deal, I would still expect yields to move back up.
PAUL SOLMAN: And, as of the bond market's close today, they had, the interest rate on the Oct. 24 T-bill back up near half-a-percent, 45 basis points, which may not sound like much, but signals that at least temporary default is a lot more of a risk than it was thought to be over the weekend.