What Drives Variation in the U.S. Debt/Output Ratio? The Dogs that Didn’t Bark

A higher U.S. government debt/output ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. The market valuation of Treasurys is surprisingly insensitive to the macro fundamentals. Instead, the future debt/output ratio accounts for most of the variation because the debt/output ratio is highly persistent. Systematic surplus forecast errors may help to account for these findings. Since the start of the GFC, surplus projections have anticipated a large fiscal correction that failed to materialize.