FROM: Lisa Sorani, Manager of HR Employee Services LS -

POSSIBLE OUTCOMES: ALTERNATIVE SCENARIO 2
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• Which h method chosen to accommodate the rise in the costs of servicing i the Government debt
will have a meaningful impact on Fixed Income investors?
• If the Government decides to raise revenue or cut spending to accommodate the rise in cost
then there will likely be two competing forces on Fixed Income returns
1. The spending cuts and higher taxes would likely lead to a slower economy, a slower economy usually
pushes down interest rates which would temporarily boost Fixed Income returns
2. On the other hand, higher taxes and reduced spending would likely force the Fed to remain
accommodative for longer which would lower the long run return for Fixed Income investors
• This process is compounded if the Government doesn’t have a balanced budget as the debt
would continue to grow leading to an ever-increasing crowding out by debt
• Taken to the limit, you can see how such a scenario would lead to an economy in a death
spiral as austerity to cover the debt service slowly chokes off the economy
Pension Consulting Alliance, Inc. ││ EBMUD Fixed Income Discussion │ 33