Concerns over US debt

The yield on ten-year US government bonds could soon rise to 6 per cent, a level not seen since 2000. This is the view of Dan Ivascyn, chief investment officer at Pimco, one of the world’s largest bond managers, who told the Financial Times that, from the current yield of 5.25 per cent, reaching 6 per cent “is certainly possible”, even in the short term. The FT describes a bond market thrown into turmoil by inflation expectations and fears over the massive US public debt (125.8 per cent of GDP), where hedge funds and other investors are now forced to close out many of their loss-making positions. Also on Friday, the Italian 10-year BTP closed at 4.6 per cent (with a spread of 109 basis points over German bonds).

The argument that “in the long term, Italy’s public finances could prove to be less unbalanced than those of the US” might have seemed highly provocative in January, when Emanuele Dicarlo of the Bank of Italy and Marco Olivari of Boston University wrote about it on lavoce.info. The article referred to a study published exactly one year ago on the NBER website, co-authored by Laurence Kotlikoff and Mauro Marè.

The paper measured the fiscal gap of the two countries, i.e. the adjustment that needs to be implemented and maintained over the years to honour the debt and future spending commitments implicit in current legislation (such as pensions). The authors estimated that an adjustment to the fiscal gap of 0.7 per cent of GDP is required for Italy – which starts from a primary surplus of around 1 per cent of GDP – and 4.3 per cent for the United States, which starts from a primary deficit of 1.5 per cent that is set to widen. It would be wrong, however, to take comfort in this comparison.

A fiscal crisis in the United States or other advanced economies would inevitably have an impact on other highly indebted countries such as Italy (138.6 per cent of GDP), as has indeed been evident in recent weeks following the rise in US Treasury yields and French OAT yields.