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How likely? How serious?

edited June 2012 in Fund Discussions

Here is the sentence that concerns me:

"With roughly 40% of U.S. Treasuries set to expire by 2013-2014, even slightly higher rates could push the interest burden to north of 15%-20% of GDP, a threshold that historically has triggered a mix of severe economic consequences, social unrest, or sharp inflation in countries unfortunate enough to cross it."

Thank you,



  • Interest rates are set at auction: if buyers bid high for Treasuries, the interest they receive will be low.

    Auction prices are set by anxiety: if buyers are in a panic, they'll buy Treasuries regardless of how low the interest is (they're even willing to accept negative real rates). That's driven by the received wisdom that you're absolutely, positively guaranteed to be able to redeem Treasuries, whereas almost everything else is either uncertain or too small to absorb demand.

    The fundamentals underlying Treasuries suck. Huge deficit, huge debt service burden, political gridlock, brinksmanship on fiscal policy, low growth by historic standards.

    If Europe continues to careen about and the Chinese admit to the extent of their own economic challenges, rates should stay low. If the Europeans find a sustainable (at least over a three to ten year frame) solution and the Chinese manage their economy, the "panic trade" in Treasuries (so-called "flight to quality") dries up and Treasuries begin to trade on fundamentals.

    Which suck.

    That's just a guess and I have no earthly idea of how likely it is that governments other than our own will act competently.

    For what it's worth,

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