In a recent analysis, Peder Beck-Friis, economist at investment management firm PIMCO, warned about the sustained rise in public debt in G7 countries, highlighting its implications for the U.S. dollar and long-term Treasury yields. According to Beck-Friis, current debt levels are approaching historic highs last seen at the end of World War II.
In his view, these surges have been driven by recent crises such as the 2008 global financial recession and the COVID-19 pandemic, which forced governments to implement extraordinary fiscal measures. “Public debt in advanced economies has followed an upward trajectory for more than a decade, and in the case of the United States, projections from the Congressional Budget Office (CBO) suggest a potential rise to 200% of GDP by 2050 if no changes are made to current fiscal policy,” the analyst warned.
The Dollar Remains Firm, for Now
Despite the concerning trajectory of U.S. debt, Beck-Friis believes the dollar will maintain its status as the dominant reserve currency in the coming years, thanks to its central role in global trade and finance. Currently, nearly 88% of foreign exchange transactions worldwide involve the dollar. “The lack of viable alternatives strengthens the dollar’s position, although the sustainability of this advantage will depend on how the U.S. fiscal outlook evolves,” the economist noted.
Another key point of the analysis is the growing weight of interest payments within the U.S. federal budget. Historically, this type of pressure has led to episodes of fiscal consolidation, as occurred after World War II and again in the 1980s and 1990s. Beck-Friis believes a similar scenario could repeat if financing costs continue to rise.
Finally, the analysis suggests that there is a (though weak) relationship between the rise in public debt (excluding debt held by the Federal Reserve) and a higher term premium on 10-year Treasury bonds. This could result in a steeper yield curve, which would have significant implications for asset managers and the valuation of fixed-income instruments. “The accumulation of public debt could lead investors to demand higher yields on long-term bonds as compensation for future fiscal risk,” Beck-Friis concluded.
