Concerns are mounting over the United States’ $14.6 trillion debt mountain and how the world’s biggest economy will deal with it, according to Schroders’ senior fixed income portfolio manager David Harris.New York-based Mr Harris, who was in Bermuda to meet with clients yesterday, said Schroders, which manages about $65 billion in fixed income investments globally, was underweight US Treasurys.“History says that when have a large and growing budget deficit, there are three ways out,” Mr Harris said in an interview. “Belt-tightening, which is very painful and which has rarely been done successfully, default, and inflating your way out of the problem, as inflation depreciates the value of the loans outstanding against you.“Hopefully in the case of the US, it will be a belt-tightening situation, however the credible path would be inflation, in which consumer prices go up and there is currency depreciation.”The probability of the US inflating its way out would likely be significant for investors over the next decade, he said, but perhaps not over the next two years.He added that so far there had been no sign of global investors in US Treasury bonds seeking to liquidate their holdings and that the dollar remained the world’s reserve currency and was still regarded by many as a safe haven.Political pressure was growing in Washington to reduce the budget deficit, Mr Harris said, and any fiscal austerity would be restrictive to the economy, so he expected monetary policy to remain loose. “I think we’re a full year away from any rate hikes,” he said.The biggest fears over sovereign debt default, however, remain in Europe. Greece has been bailed out by the EU and the International Monetary Fund, but many experts now think a restructuring of its debt will be necessary to avoid default.“A year and a half ago, when people were looking at Greece, they were talking about a liquidity problem,” Mr Harris said. “But since then, it’s become apparent that the liquidity crisis was actually a symptom of insolvency.“It’s become clear that the debt exceeds the country’s ability to pay for it. It can be financed, as long as confidence exists. The crisis deepens when investors become less willing to finance it.“I think its still has not been fully recognised that insolvency exists. They’re trying to deal with it through bailouts and extending maturity of the loans in other words, kicking the can along the road.”Ireland, Portugal and Spain were facing similar problems with varying causes, he added. All of them can stave off a deepening crisis, as long as their debt could be funded, he said. Both Spain and Ireland had gone through property booms that had led to problems with the banks and much of the burden had been transferred from the private sector to the public sector, as governments and central banks came to the rescue.A substantial amount of funds has flowed into the debt of flourishing emerging economies in recent years, but some developing countries are now struggling to contain inflation. In Brazil and India, an unusual yield curve inversion has taken place, meaning that short-term interest rates are higher than longer term. Historically, this has often indicated that an economic downturn is around the corner.But Mr Harris said the influx of money into emerging market debt had lowered the risk premium, leading to lower yield for longer-term bonds, while the impact of higher commodity prices which was relatively much greater in developing economies than in the US or Europe was forcing governments to “use monetary policy to apply the brakes” in the form of higher interest rates.Schroders has been reducing its exposure to corporate bonds in the second quarter, while increasing investments in residential and commercial mortgage-backed securities and covered bonds. Some of the MBS were guaranteed by US Government agencies and offered a premium of 100 basis points over Treasurys, Mr Harris said.Although MBS and CMBS had got a bad name during the financial crisis, Mr Harris said the collateral behind them was now based on valuations that had come down to “rational levels” and that the CMBS had been created in the past 18 months.Covered bonds are also collateralised and backed by cash flows generated by pools of mortgages, but these relate to loans that remain on the issuer’s books.