on gilts, again

Chris Dillow has another article challenging George Osborne's view that the markets are concerned by UK government debt. As I said previously,

The popularity of gilts is not a vote of confidence, any more than the captain of the Titantic could boast that passengers where using *his* lifeboats and thus showing confidence towards the White Star.

Comments

[chris]

Your lifeboat analogy is good, in the sense that a big reason for low yields around the world is that there has for a long time been a shortage of lifeboats, as Ricardo Caballero has discussed:
http://www.ecb.de/events/pdf/conferences/cbc4/Caballero_paper.pdf
However, although there is such a shortage globally, it's quite possible that the marginal investor would have dumped gilts (in favour of other government bonds), had he been seriously worried about the deficit; there have been lifeboats available other than White Star ones.
That this hasn't happened suggests that investors aren't seriously worried by the deficit, surely?
Even if this inference is too strong, surely we can infer that the deficit is easily financeable until (unless) this changes.

[aje]

Perhaps i'm viewing this too homogenously, but what other government bonds (other than gilts) would you expect investors to move to if they are pessimistic about public finances?

[chris]

You'd expect them to buy the bonds of governments which have less debt. According to OECD data on gross financial liabilities, the Australian and New Zealand governments have significantly less debt than the UK, US or most main euro nations:
http://www.oecd.org/document/61/0,3343,en_2649_34573_2483901_1_1_1_1,00.html
However, yields there are higher than in the UK and US.

[aje]

Maybe i'm focusing too much on UK investors, but I can imagine scenarios where pessimism moves people from corporate bonds to gilts without pushing them to invest abroad (since this would bring about new transaction costs). But yes, I take your point.