Rising Interest Rates: A Sobering Outlook on Federal Debt Payments

Standard & Poor's Throws the First Volley at the Record U.S. Deficit Cutting the Rating Outlook to Negative (but still maintaining the AAA Rating).  Stock Futures Drop 167 Points

The act this morning by S&P will accelerate the increase in interest rates for all loans in the U.S. and will significantly increase the annual interest charge on the Federal Debt.

Increasing rates will mute both the recovery in the economy and real estate markets.

The graph below shows the Congressional Budget Office’s (CBO) forecast and history on total interest payments for the U.S. debt.  Key is that the forecast assumes there is no increase in interest rates and that we will have no new Federal spending programs not already in the budget.

One year Treasury-Bills averaged 0.318 percent in 2010, while the two-year Treasury Note averaged 0.703 percent.
What this says is that if the two-year Treasury note yield increased to 2.2 percent (the anticipated cost of inflation this year), then expected interest expense on the debt triples to more than three trillion dollars in 2020.

Interest rates are increasing—it’s just a matter of when.

S&P cuts U.S. ratings outlook to negative


Comments

  1. SpudNV

    And does anyone wonder why gold is $1,500 per ounce and trending higher?

  2. john hagerman

    Ted- Great job today on your luncheon talk. I am with you on your comments. I am telling my adult kids about your blog. Keep us posted on the location of future talks. Thanks John

  3. ted

    I don’t follow your math. At 2.2% interest rates, Total Debt would have to be $136 Trillion (20x our current levels and 6x GDP) in 2020 in order to get to $3 Trillion in annual interest expense.

    1. Ted C. Jones Post author

      Interest on the debt in 2010 was $414 billion and the two-year Treasury averaged 0.7 percent.

      If rates rise to 2.2 percent (that’s roughly three times the current rate) and assuming the two-year Treasury is a reasonable proxy for all the rates (spanning down from 30-year Treasury rates which today are 4.24 percent) then annual interest payments would triple. Three times the 2010 interest of $414 billion is $1.242 trillion. And if the debt doubles, then two times $1.242 trillion is $2.484 trillion.

      Looks like the math works to me.

      You agree?

      Ted

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