BIS: Fiscal Sustainability Concerns Likely To Affect Forward Yields

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Monday, the Bank for International Settlements said rising concerns about the fiscal outlook could be expected to add upward pressure on real forward rates.

The Basel, Switzerland-based BIS said in its latest quarterly review, "Fiscal sustainability concerns are likely to affect forward yields that span distant horizons, which are less influenced by near-term expectations about inflation, economic growth and monetary policy."

According to BIS, the U.S. government is expected to borrow a total of US$1.8 trillion in FY 2009, reflecting a 137% surge from an already elevated level in FY 2008. Such large new government debt would make it difficult for markets to absorb. Along with this concern, worries about the sustainability of rapidly rising fiscal deficits were seen as reasons behind the rise in US long-term yields that was seen in the first half of the year.

Despite surging fiscal deficits and record low monetary policy rates, long term inflationary pressures appear to be contained for now, the BIS added. This might mirror the belief that the current high level of economic slack would persist for some time.

Monday, the Bank for International Settlements said rising concerns about the fiscal outlook could be expected to add upward pressure on real forward rates. (Market News Provided by RTTNews)