Treasury Secretary Says Rates Relatively Low
U.S. Treasury Secretary Henry Paulson on Thursday shrugged off a recent uptick in volatility in financial markets, and said overall conditions remain strong.
"You're always going to see volatility," he said during a question and answer session following a presentation at the Council on Foreign Relations in New York. "Underlying market conditions are still good."
His comments come after a week of huge swings in U.S. stocks and a jump in bond yield that put the 10 year note at a five-year high.
But Paulson noted that interest rates on U.S. bonds remain low on a historical basis and compared in general with the rest of the world.
However, he added that the rise in yields is a "wake-up call" to excess lending practices. Such lending has led to high foreclosure rates on mortgages that has made the housing slump more severe.
"Borrowers need to be more conscious of risks," he said. "And lenders need to be more vigilant."
Paulson said he is working on fixing global imbalances, which are reflected in huge trade deficits among countries including the United States, while others such as China are running large surpluses.
"It is a shared responsibility (among all nations) and it will take time" he said.
One answer, he said, is for countries such as China and Japan to alter their export-driven economies by creating a structure to allow for a larger consumer base. This will drive up domestic demand, he said.
He added that China needs to be more flexible with its currency to allow greater appreciation. He did not mention recent bills by U.S. lawmakers that seek to apply more pressure on China in terms of its undervalued currency.
Paulson said he wasn't overly concerned about foreigners holding too many U.S. Treasury bonds, which could cause a sharp decline in the greenback if many holders decide to cash in at once
Foreigners buying Treasurys is a positive because it shows they have confidence in the U.S. economy, Paulson said. He added that U.S. government debt still offers the best risk-adjusted rate of return.