Impact Of Interest Rates On The Federal Debt Interest Payments

On March 12, The Wall Street Journal published an editorial titled “Uncle Sam’s Teaser Rate.”  The subtitle is “Low interest rates disguise the federal debt bomb.”

I find this editorial notable as it highlights a variety of important issues that lack recognition, including the refinancing schedule of U.S. Treasury debt, the sensitivity of debt interest payments to rising interest rates, and the Federal Reserve being among the largest buyers of U.S. debt.

A few notable excerpts from the editorial include:

First, a couple facts: the U.S. Treasury currently has $10.7 trillion in outstanding publicly-held debt, and more than $8 trillion of it must be repaid within the next seven years. More than $5 trillion falls due within the next 36 months.

This relatively short-term debt sheet is no accident. Like a subprime borrower opting for a low teaser rate, the government has structured its debt to keep current interest payments low. This is a political temptation for every Administration because it means lower budget deficits on its watch.


As of January 2012, taking into account all the various notes and bonds issued by the federal government to the public, Uncle Sam is paying an average interest rate of 2.24%. The government expects to spend in the neighborhood of $225 billion this year making interest payments.


If the government had to pay the 5% rate that it was offering before the financial crisis on today’s debt, the annual interest payments would be $535 billion…



The Special Note summarizes my overall thoughts about our economic situation

SPX at 1392.92 as this post is written