August 3, 2011


A Bullish View on U.S. Treasuries: Interviewee: Kent Hughes, Director, Program on America and the Global Economy, Woodrow Wilson International Center for Scholars (Interviewer: Christopher Alessi, Associate Staff Writer, August 3, 2011, CFR)

Do you think investors still see U.S. bond markets as being more stable than emerging markets, such as Latin America or China?

China has an inflation problem they are still wrestling with. In parts of the country, they have a housing bubble and a rising cost of living. China is going to increase food imports as a way of dampening the rise of the price of food. So you could see China, in attempting to deal with some of these things, slowing its growth a bit--although I don't see China allowing its growth rate to slip below 8 percent. It's more difficult to know exactly what investments would be there when you don't have a convertible currency. The system is more opaque. You don't have the same rule of law that you do in Europe, the United States, and many parts of Latin America.

With regard to Brazil, that looks like a more stable opportunity, but again, they have to keep their eye on both inflation and the fact the real has been pushed up by a good deal of foreign investment--some of it foreign direct investment, which will be good for the long term, but some of it portfolio investments that are really responding to the higher interest rates there. South Africa, which is a new BRIC country--China added it recently--I don't think that's a major investment opportunity. Russia is very much still a commodity exporter and would depend heavily on those markets. India has enormous long-term promise, but again doesn't have the deeper markets that you would want. All things considered, there's going to remain a significant demand for U.S. treasuries. PimCo [Pacific Investment Management Company, the world's largest mutual fund], which had gotten out of U.S. treasuries, is now getting back into them, thinking that is a better long-term deal.

There's been some speculation that if the United States was downgraded from its AAA status, there could be a move from the dollar as the world's reserve currency. Is that on the horizon?

I don't see it coming in the near term. The big alternative to the dollar was the euro--and that, right now, looks considerably less attractive. You could see many years in the future, twenty years in the future, if China were to continue to [grow] and if China were willing to allow its currency to be convertible and so forth, there might be a greater range of currencies in which you would invest. People certainly do invest in Swiss francs, but there's just not enough of them to be an alternative to the dollar. If there's a [credit] downgrade, that would not have a major impact on the attraction of U.S. treasuries, which would continue to be viewed as the best bet.

I think in the end that Congress will deal with the long-term fiscal challenge that we face. I'm not saying that a downgrade is a good thing--it's not. And it would be an historic change that would certainly be a big symbol. But the bigger the symbol, the more the United States often reacts in a very positive way.

Well, that's no way to scare Washington into the minor reforms required.

Posted by at August 3, 2011 6:08 PM

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