ING comes to mind as a candidate.I see your point, but isn't it pretty much the only candidate ?Banks very rarely have top credit ratings any more, and economic theory tells us that it is not optimal for them to do so.ING can only issue a relatively small amount more debt without risking it's credit rating, so cannot even hope to supply the market if government debt ceases to be so good.As HTMLballsup says, capital adequacy and other stuff means that banks don't really want to have low margin stuff on their books.Even if more banks issued more high grade debt presumably as various forms of credit derivative, there woiuld be the issue of fungibility. Two banks might synthesise some cash streams into a fund that can be rated as AAA, the only hard bit is for them not to give away too much. However, two AAA bonds working off different credit derivatives are really not the same. Even if you took the trouble to make them have the same coupons and payment dates, the underlyings and the competence with which they are managed will not be identical.Government bonds are thus very much superior in this variation on liquidity, and of course there are a lot of them. We also need a variety of maturities, preferably for zero risk, so we can price a whole pile of other things and hedge properly. In particular, can we work out what would happen to the swaps market, if a big government had a serious downgrade ?Presumably spreads would widen a lot even on vanilla swaps.

QuoteOriginally posted by: DCFCING comes to mind as a candidate.I see your point, but isn't it pretty much the only candidate ?Banks very rarely have top credit ratings any more, and economic theory tells us that it is not optimal for them to do so.ING can only issue a relatively small amount more debt without risking it's credit rating, so cannot even hope to supply the market if government debt ceases to be so good.As HTMLballsup says, capital adequacy and other stuff means that banks don't really want to have low margin stuff on their books.Even if more banks issued more high grade debt presumably as various forms of credit derivative, there woiuld be the issue of fungibility. Two banks might synthesise some cash streams into a fund that can be rated as AAA, the only hard bit is for them not to give away too much. However, two AAA bonds working off different credit derivatives are really not the same. Even if you took the trouble to make them have the same coupons and payment dates, the underlyings and the competence with which they are managed will not be identical.Government bonds are thus very much superior in this variation on liquidity, and of course there are a lot of them. We also need a variety of maturities, preferably for zero risk, so we can price a whole pile of other things and hedge properly. In particular, can we work out what would happen to the swaps market, if a big government had a serious downgrade ?Presumably spreads would widen a lot even on vanilla swaps.I guess my main point is that governments should not feel obligated to always be in debt just because the financial markets have a demand for risk-free bonds. Granted though, worrying that governments would hurry up and pay off all there debts leaving T-bond traders unemployed is the opposite of what most of us are really worried about.

QuoteOriginally posted by: exotiqI guess my main point is that governments should not feel obligated to always be in debt just because the financial markets have a demand for risk-free bonds. Granted though, worrying that governments would hurry up and pay off all there debts leaving T-bond traders unemployed is the opposite of what most of us are really worried about.Historically, government debt has been hugely beneficial to the financial system and to real activity. If a government ran a natural surplus it could still make sense for it to borrow money and invest it in risky activities.

QuoteOriginally posted by: AaronQuoteOriginally posted by: exotiqI guess my main point is that governments should not feel obligated to always be in debt just because the financial markets have a demand for risk-free bonds. Granted though, worrying that governments would hurry up and pay off all there debts leaving T-bond traders unemployed is the opposite of what most of us are really worried about.Historically, government debt has been hugely beneficial to the financial system and to real activity. If a government ran a natural surplus it could still make sense for it to borrow money and invest it in risky activities.You can however get too much/easy money and then you get misallocation.Barclays Cap did a good bit in this years Equity Gilts study on the effects of demographics. They were saying unless you start issuing less financial instruments (government and corporate) theres not going to be the demand to balance the supply.My bet is Europe are going to go this way, while the US is looking for a good dose of inflation to sort out there problems. Of course another way is to try to spread some of that wealth around - and let countries who do have capacity for growth pay for your pension.....