The deficits facing the United States have put the nation in the unenviable position of an expensive place to go looking for capital. As the Federal Reserve takes dead aim at higher short-term rates in its quest for normalization, the entire U.S. Treasury yield curve has moved up (Figure 1).  Daily we hear from analysts that the 10yr is going to reach 3% any day now and some are forecasting that the rate has further to run, perhaps, to the mid-3% range. Warnings abound about the negative impact on the stock market should the 3% level be breached. While some welcome the rise in rates as sign of a robust economy, the question remains whether the U.S. economy can tolerate much higher rates given existing the debt levels in government and in nations’ households.

                           Figure 1 The Expected Shift in the U.S. Yield Curve

Whatever one’s view as to whether the higher rates are a “good “or “bad” there is little doubt that the United States is a very expensive place to raise money. Figure 2 measures the spread between the U.S. Treasuries and sovereign debt among the major economies. The spreads in favour of the United States are the more remarkable given that all countries have enjoyed an uptick in growth and in some inflation.

                                             Figure 2 US Bond Spread Over Comparable Foreign Debt