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Analysis: As debt maturities loom, U.S. needs to extend

Analysis: As debt maturities loom, U.S. needs to extend
On Thursday September 1, 2011, 12:09 pm EDT
By Karen Brettell

NEW YORK (Reuters) – Insatiable demand for safe haven U.S. government bonds is helping mask a potentially huge financial problem — the need to extend the maturity of debt issued by the United States.

The United States has the least balanced maturity schedule of any major nation. Over 70 percent of its bonds mature within 5 years, compared with an average 49 percent for the 34 member countries in the OECD.

This leaves the country extremely vulnerable to any shift in investor sentiment at a time when its debt load has almost doubled in four years.

Marketable U.S. debt has risen to over $9 trillion, from around $5 trillion in late 2007, before the government increased spending to bail out struggling financial companies.

If sentiment were to shift quickly, it could send the cost of refinancing the country’s bonds sharply higher. This would, in turn, eat into its budget and ability to meet long term obligations.

In a worst-case scenario the country might not be able to refinance at all.

“There has never been a single example in the history of finance where financing long-term liabilities, which we are, with short-term debt, ends well,” said Mitch Stapley, chief fixed income officer at Fifth Third Asset Management in Grand Rapids, Michigan.

The Treasury has been extending the average maturity of its debt. However, with proportionally few longer-term bonds and large long-term liabilities, more work is needed.

Though some of these worst-case scenarios for U.S. debt might appear unlikely, Standard & Poor’s recent downgrade of treasuries should serve as a reminder that once unshakable confidence in the United States can come under question.

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