Increased borrowing by the U.S. Treasury to finance growing budget deficits will:

Question

Quizplus · Accepted Answer

As the U.S. Treasury increases borrowing to finance budget deficits, it creates more supply of Treasury bonds in the market which may cause the yield on U.S. Treasury bonds to increase due to the higher risk of default. However, given the perception of the U.S. government as a safe haven borrower, the yield on Treasury bonds is likely to still be lower than similarly rated corporate bonds. This may result in an increase in the spread between the two yields, as investors demand a higher premium for investing in riskier corporate bonds. Therefore, option C is the correct choice.

Increased Borrowing by the U