Bill Gross : “debt super cycle.”

U.S.’s $13 Trillion Debt Poised to Overtake GDP

By Garfield Reynolds and Wes Goodman

June 4 (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”

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The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”

Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s.

“The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”

To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: June 4, 2010 05:06 EDT

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“Spain’s downgrade just adds to more uncertainty,”

U.S. Stocks, Oil, Euro Tumble; Dow Ends Worst May Since 1940

May 28 (Bloomberg) -- U.S. stocks slid, capping the worst May for the Dow Jones Industrial Average since 1940, while the euro slumped and Treasuries rose as a downgrade of Spain’s debt rating and escalating tensions on the Korean peninsula triggered a flight from riskier assets.

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The Dow tumbled 122.36 points, or 1.2 percent, to 10,136.63 at 4 p.m. in New York and lost 7.9 percent this month. The Standard & Poor’s 500 Index sank 1.2 percent to 1,089.41, led by financial shares on the Spanish downgrade and energy companies after U.S. President Barack Obama extended a moratorium on new deep-water drilling. Oil erased gains after rallying as much as 1.6 percent to more than $75 a barrel. Ten-year Treasury yields decreased 7 basis points to 3.3 percent. The euro slipped 0.7 percent to $1.2273.

Equities and commodities extended losses after Fitch Ratings stripped Spain of the AAA rating it’s held since 2003, saying the nation’s economic growth will slow as it attempts to cut its debts. Earlier losses followed disappointing U.S. economic data and a North Korean general’s warning of “all-out war” if any accidental clashes with South Korea break out.

“Spain’s downgrade just adds to more uncertainty,” said Quincy Krosby, chief market strategist for Newark, New Jersey- based Prudential Financial Inc., which oversees about $667 billion. “There are too many geopolitical events. We have a three-day weekend in the U.S., and traders will definitely want to lighten their books.”

‘All-Out War’

Losses in U.S. stocks widened earlier after North Korean Major General Pak Rim Su disputed the results of the international investigation that found his nation sank a South Korean warship. “Any accidental clash that may break out in the waters of the West Sea of Korea or in areas along the Demilitarized Zone will lead to all-out war,” he said, according to North Korea’s official news organization.

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