Increase in Bond Yields may pull US and Japan Economies Down

Major economies risk ballooning debt loads unless their growth can keep pace with increases in borrowing costs as spending on the elderly rises, according to the Bank for International Settlements.

Japan’s public debt would swell to 600 percent of gross domestic product by 2050 on a 2 percentage-point increase in funding costs, should its age-related government spending continue unchecked, the Basel-based BIS said in its 83rd annual report. In the U.S., the debt-to-GDP ratio would almost double to 200 percent under the same circumstances, it said.

“Governments in several major economies currently benefit from historically low funding costs,” the BIS said. “At the same time, rising debt levels have increased their exposure to higher interest rates. The consolidation needs of countries experiencing low interest rates would be greater if their growth-adjusted interest rates were to rise.”

Bond yields around the world jumped last week after Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may begin dialing down its bond purchases this year and end them in mid-2014. That signals higher borrowing costs for governments as the recovery in the U.S. gathers momentum.

Treasury 10-year note yields rose past 2.5 percent for the first time in almost two years on June 21, having climbed from a record low of 1.379 percent set on July 25, 2012. The average yield to maturity on the more-than-20,000 securities in the Bank of America Merrill Lynch Global Broad Market Index rose to 2.03 percent on June 20, the highest since April 26, 2012.

Bloomberg

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