Vanguard’s fixed-income group head was recently inducted into the Fixed Income Analysts Society, Inc.’s Hall of Fame. So far, the US has benefited from foreign investors’ appetite for Treasuries which they consider a safe haven from the precarious situation in Europe.
The high demand is enabling the US to continue funding higher and higher budgets and pushing public debt to record levels. Public debt in the US has grown from less than $9 trillion in 2007 to just under $16 trillion today.
Because the dollar is still considered the world’s dominant currency, the US Treasury market offers liquidity that would not be available with the existence of a viable alternative. The Fed’s commitment to keep interest rates low is working toward the Treasury time bomb because investors are not being sufficiently rewarded for holding long-term debt.
Vanguard surpassed Fidelity in 2010 as the largest holder of Treasury debt. It is the eighth largest global US creditor. The situation mandates working with the newly elected president to construct a three- to five-year plan to steer the US on a sustainable budget path.
The approaching fiscal cliff possibility along with the Treasury time bomb could combine to be the outlier factor in what would cause interest rates to spike and inflation to rear its ugly head. But as long as the global economy is lackluster and the dollar remains the best looking currency, the US will be able to continue its low interest rate environment.
Whether that morphs into deflation as it has in Japan is something about which not many people seem to be talking.

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