This week Ben Bernanke again affirmed the Fed's commitment to an open-ended policy of quantitative easing and maturity swapping. The yield of on the 10 year Treasury note remains at historic lows, as does the TIPS spread. In other words, to the extent that you view long-term rates as the market's best guess about the future, the market is telling you that we aren't going to see a return to higher interest rates for years and years to come.
This is good news for people buying or refinancing houses, but it is rather disturbing as a forecast of future economic activity. We are 2 years into a tepid recovery. If this business cycle resembles past business cycles, we'll see the end of the expansion in 12-18 months. If that happens, unemployment will still be above 6 percent when we head into the next cyclical downturn. And because real interest rates will be at or below zero, the Fed's ability to moderate the next recession by lowering interest rates will be nil. And if Congress and the White House can't come up with a less punishing alternative to deep across-the-board budget cuts, the next recession will arrive ahead of schedule and be longer and deeper than it would otherwise be.
As an investor, I find this a very troublesome outlook. For the past year, the trend has been my friend and my formerly devastated IRA and 401k have gotten healthy again as the stock market has recovered. But I'm past retirement age and would like to be shifting my portfolio to safe, fixed-income securities, except there aren't any that pay a decent interest rate. So whether I like it or not, I'm locked into stocks. Anybody else in the same boat?
The Treasury Bulletin, available online from the Financial Management Service categorizes ownership of U.S. Government securities by types of investors.
What is the Debt Held by the Public?
The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.
What are Intragovernmental Holdings?
Intragovernmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.
Now if interest rates are allowed to skyrocket...or even get to where they should be...what does that do to the debt? This is finance 101...they have to keep the interest rates low. What would they have to pay out in interest returns if they had to pay .10 on the dollar vs .03 or .025?
I don't think so. Remember that a large part of our debt is bought by foreigners. If they believe that the debt is risky, they will demand higher interest rates at the Treasury auctions. That just hasn't happened. In fact, almost the opposite has happened: foreigners have been willing to buy US sovereign debt with a negative real interest rate. Partly that reflects this sad state of European sovereign debt [Greek bonds, anyone? Irish bank notes? Portuguese t-bills?] And partly it reflects an understanding that the US debt, as a percentage of US GDP, is falling back toward a less alarming level.