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Bond Markets Fret Over U.S. Debt Explosion

By    |   Monday, 04 May 2009 03:41 PM

The next big worry for financial markets: the U.S. government’s burgeoning debt burden.

Thanks to increased spending and reduced tax revenue, the budget deficit is on pace to reach $957 billion this year, or about 14 percent of GDP.

That ratio is unmatched since World War II, according to research firm Wrightson ICAP, as cited by The New York Times.

The Treasury has warned that the debt will probably burst through the current ceiling of $12.1 trillion during the second half of the year, meaning Congress will have to lift that limit.

The Congressional Budget Office predicts that debt as a percentage of GDP, will rise to 51 percent this year and peak around 54 percent in 2011.

But Warren Buffett says that might be a gross underestimate. He tells CNBC that the ratio could easily surpass 80 percent.

The bond market clearly is worried.

The yield on the 10-year Treasury note has risen to a six-month high of 3.17 percent. A rising deficit means that the government must issue more bonds to finance the debt.

"Supply is the big issue” for the market,” John Canavan, an analyst at Stone & McCarthy Research Associates, tells Reuters.

Buffett says inflation will be the end result.

“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,” he tells CNBC.

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The next big worry for financial markets: the U.S. government’s burgeoning debt burden.Thanks to increased spending and reduced tax revenue, the budget deficit is on pace to reach $957 billion this year, or about 14 percent of GDP. That ratio is unmatched since World War...
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Monday, 04 May 2009 03:41 PM
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