Cost of Servicing US Debt Hits Decade High
After Pres Trump signed a bill raising the debt ceiling last fall, we warned that rising interest rates could crush the US federal budget under interest payments. Well, interest rates are going up and so is the cost of servicing the US government’s $21-plus trillion debt.
The yield on the 10-year US Treasury crept closer to 3% Monday, rising 8 basis points to 2.965% after reports that other central banks could be set to join the Federal Reserve in pulling back from easy-money policies. Yields in the UK, Germany and Japan also climbed as bond prices dropped. A report that the Bank of Japan might be set to raise interest rate targets was the primary catalyst.
Bond yields – the interest rate paid to bondholders – move inversely to bond prices. As demand for bonds falls, prices drop in response and yields rise. Practically speaking, this means bond issuers such as the US government have to pay higher interest rates to entice investors to buy bonds. That’s not good news when you’re trying to finance a $21 trillion debt.
Analysts say Pres. Trump’s criticism of the Federal Reserve’s interest rate policies was also likely a factor in driving Treasury yields higher. The president took aim at the Fed during an interview on CNBC late last week, saying he’s “not thrilled” with the central bank’s push to raise rates. As CNBC put it, “traders said the Federal Reserve would now be sure to stay on its rate hiking path to prove its independence.”
Meanwhile, the US Treasury Department auction off $35 billion of 2-year government notes at the highest yield since 2008. According to data released by the Treasury Department, the yield on the newly minted 2-year bonds came in at 2.657%.
According to a Reuters report, the Treasury plans to auction $36 billion of five-year notes today and $30 billion of seven-year notes on Thursday. It will also auction $18 billion in two-year floating-rates on Wednesday – all in this higher interest rate environment.
This means the government will have to pay more in interest payments just to service this new debt.
And consider this: while they are creeping up, bond yields aren’t particularly high historically speaking. If the interest rate on Treasury debt stood at 6.2% – as it did in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion.
No wonder Pres. Trump doesn’t like the Fed’s interest rate hiking trajectory. The US government simply can’t afford anything approaching a “normal” interest rate environment.
The US government is already laboring under crushing interest payments. As we reported last month, at the current trajectory, the cost of paying the annual interest on the US debt will equal the annual cost of Social Security within 30 years.
Growing debt coupled with soaring interest payments creates a vicious upwardly spiraling cycle. As debt grows, it costs more money to service. That requires more borrowing, adding to the pile of debt.
This is bad news if you’re counting on a growing economy. Debt stifles economic growth. Multiple studies have shown GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy.
Peter Schiff has said the massive debt could eventually spur on the dollar collapse. How it will all play out remains to be seen, but it’s pretty clear the US has taken an unsustainable path.
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