Stephen Foley: America’s $15 trillion mountain of cheap debt

Retail sales in America have moved ahead – slowly but surely

Funding a large deficit has never been cheaper. The interest rate that the US government is required to pay on its debt, as measured by the yield on the benchmark 10-year Treasury, hit an all-time closing low on Thursday, below 1.7 per cent. For anyone worried about the $15 trillion national debt, this is good news. And a bad sign.

The slide in yields below their nadir last autumn, when investors were responding to a spring and summer of disappointing economic data, is especially surprising because the US recovery appears to be on firmer ground now. Unemployment is nudging lower – slowly but surely – while business investment and retail sales have moved ahead – slowly but surely.

There are genuine concerns over what happens to the economy here as the US approaches a "fiscal cliff" at the end of the year, when the Bush tax cuts expire and much of the 2009 stimulus spending runs out. That contraction, though, is likely to be mitigated by a tax deal in the lame-duck session of Congress at the end of the year, when politicians get a brief respite from the electoral cycle and are actually able to turn their faces to the public good. If the lame-duck session fails, it seems from the minutes of the Federal Reserve's interest rate-setting committee this week that the Fed is willing to step in with more quantitative easing.

So, why so low? Inevitably, the answer is Europe. The alarming developments in Greece and now Spain have caused a flight to safety. Government bonds around the world have all become more appealing, but none more so than the US, which despite its long-term fiscal challenges remains the haven of last resort in a financial crisis.

If the record-low yields are anything to go by, investors are bracing for unpleasant developments in the eurozone, and soon. Yes, that will make servicing the national debt nice and cheap, but it is also a sign of a crisis that would hardly leave the US economy unscathed. And if the US turns down again, fixing the deficit will get that much harder.