By: Mike Campbell
Speaking before the US Congress, Federal Reserve Chairman, Ben Bernanke, warned that the US may have to pay more money to service its budget deficit. According to predictions made by President Obama, the US budget deficit is set to rise to $1.56tn in 2010.
Much of this borrowing is funded by government bonds which give a guaranteed return on investment over their lifetime. They are perceived as being a low risk investment tool because Uncle Sam is usually good for the money. However, there is growing concern about sovereign indebtedness - as one can see clearly in the case of Greece, right now. Bernanke cautioned “It's possible that bond markets will be become worried about the sustainability of the debt. We may find ourselves facing higher interest rates , even today.” This would mean that the yield on the bonds would have to rise in order to attract investors to purchase them.
Much of this borrowing is funded by government bonds which give a guaranteed return on investment over their lifetime. They are perceived as being a low risk investment tool because Uncle Sam is usually good for the money. However, there is growing concern about sovereign indebtedness - as one can see clearly in the case of Greece, right now. Bernanke cautioned “It's possible that bond markets will be become worried about the sustainability of the debt. We may find ourselves facing higher interest rates , even today.” This would mean that the yield on the bonds would have to rise in order to attract investors to purchase them.
Chairman Bernanke reiterated his position that US interest rates will remain low (currently they lie between 0 and 0.25%) to continue to support the fledgling recovery. The message may have soothed the markets which closed about 1% higher in the USA. A move, last week, to tighten the costs of emergency borrowing by 0.25% to 0.75% caught the markets by surprise sending them lower (by about the same margin).
The markets fear that higher borrowing costs would harm business activity – a position shared by the Federal Reserve Chairman. The impetus for moving the interest rates higher will come from the emergence of significant inflationary pressures in the US economy or a need to defend the value of the Dollar. At the moment, neither of these factors is pressing and the need is to ensure that the recovery gains strength such that more jobs will be created, tackling the US unemployment problem which currently is probably the biggest headache.
The markets fear that higher borrowing costs would harm business activity – a position shared by the Federal Reserve Chairman. The impetus for moving the interest rates higher will come from the emergence of significant inflationary pressures in the US economy or a need to defend the value of the Dollar. At the moment, neither of these factors is pressing and the need is to ensure that the recovery gains strength such that more jobs will be created, tackling the US unemployment problem which currently is probably the biggest headache.