What Drives Variation in the U.S. Debt-to-Output Ratio? The Dogs that Did not Bark

A higher U.S. government debt-to-output (D-O) 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 D-O ratio. The market valuation of Treasurys is surprisingly insensitive to macro fundamentals. Instead, the future D-O ratio accounts for most of the variation because the D-O ratio is highly persistent. Systematic surplus forecast errors may help account for these findings. Since the start of the Global Financial Crisis, surplus projections have anticipated a large fiscal correction that failed to materialize.