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Anyone smart at economics able to share what type of pressure the US is facing on servicing the growing debt (making interest payments) with rates increasing? D

Anyone smart at economics able to share what type of pressure the US is facing on servicing the growing debt (making interest payments) with rates increasing? Does the fed fund rate directly affect how much interest has to be paid on national debt?

adam_arthur 4y ago
I haven't run the numbers, but cost of servicing the debt will depend on the structure of debt issued. A 30y treasury doesn't need to be refinanced/paid back for 30 years, 10y for 10 years etc. A smart Treasury would have locked in a lot of the debt in longer dated treasuries back when they were yielding 1% or less. This would have made the debt payments largely fixed, regardless of Fed hikes. Unfortunately from what I've heard, they are mostly financing through the fed funds/overnight rate. So yes, US debt service costs are more variable than they could have been. But maybe somebody can chime in with hard numbers
- Ekaros 4y ago
  Doesn't that also mean that carrying cost of debt now and while rates are up issued will carry these high rates for long time? Even if rates go back down.
dkjaudyeqooe 4y ago
Doesn't affect existing debt but as bonds mature they need to be replaced and that's when servicing costs go up. That happens all the time since bonds are always maturing, but there are different maturities (2, 10, 30 year) so servicing costs go up relatively slowly.
55873445216111 4y ago
Fed funds rate and total interest paid on outstanding treasury bonds are not a 1:1 relationship. The coupon payments of a bond are determined at the time of issuance. So for example if a 30 year bond was issued 10 years ago, the ongoing coupon payments that the US treasury is paying today on that bond are a fixed amount that was determined at the time the bond was issued 10 years ago. Every individual issuance of bonds has a specific coupon payment which is determined at time of issuance.
boole1854 4y ago
Very little pressure. https://fred.stlouisfed.org/graph/?g=UtqF https://fred.stlouisfed.org/graph/?g=UtqF Interest payments relative to federal tax receipts are at multi-decade lows. Some other important points to remember: - $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out. - Inflation has risen faster than rates have risen. This means federal tax receipts will likely rise faster than interest payments as well.
- rank0 4y ago
  > Interest payments relative to federal tax receipts are at multi-decade lows. It'll take some time before the current debt needs to be replaced at the higher rate. We've had artificially low rates for the past 14 years. I argue that spending 20% of tax revenue on interest alone is grossly irresponsible. We still need to pay out the face value of those treasuries too. > $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out. It "doesn't count" if you ignore the accelerating wealth disparity in our society.
  - boole1854 4y ago
    > It "doesn't count" if you ignore the accelerating wealth disparity in our society. The parent asked about how interest rates affect the burden of servicing the debt. That is the sense in which it literally "doesn't count" -- interest paid by the Treasury to the Fed is returned by the Fed to the Treasury as distributed earnings.
- missedthecue 4y ago
  The federal reserve's remittances to the treasury are likely to be completely wiped out within the coming year. The reason is that the (low) interest it earns on its existing portfolio of government securities is fixed and will stay flat while the interest the fed pays out is rising sharply and will rise even further as rates increase. The fed is not rolling over its government debt portfolio into new debt at higher rates. Rather it is undergoing quantitative tightening selling off/allowing bonds to mature.
jnwatson 4y ago
Current average maturity of US debt is about 5 years. So, it won’t happen immediately; interest payments will gradually rise over the next several years.
JieJie 4y ago
I'm complete numbskull at economics, but I assume my bank is pretty good at it. They are absolutely thrilled for me to have a balance on my credit card of as much as I please (up to the debt limit), as long as I make my minimum payment each month.
- ryathal 4y ago
  Same is true for the US, but we don't know the limit. It could be 32T or 332T, either way when it gets hit bad things happen.
rank0 4y ago
That's an excellent question...absolutely it does! Not many people seem to pay attention to this fact. Every year we have a multi-trillion dollar deficit in our congressional budget. To make up this difference, the treasury department has to sell bonds. As the FFR increases, so do the yields on treasuries. Our annual interest payments on federal debt is ~400B. That's over HALF our military budget for some perspective. If inflation proves to be sticky, what happens if bond yields get pushed up to 10% ? Well, now congress has to borrow at 10% interest. That next 1T+ deficient would cost our country an extra 100B+ per year in coupon payments...AND we still owe the principle on those bonds when they expire. In the volcker era, we had to push interest rates up to almost 20%. Our government has been incredibly irresponsible with managing our debt. Problem is fixing it seems impossible. We'd need to increase taxes AND cut social services. Can you imagine how painful that would be? Any politician who tried to tackle this issue would become the most hated person in America.
kristjansson 4y ago
The fed rate is, roughly, the rate for new government borrowing. So newly issued bonds will have to pay higher prevailing rates. Also, most bonds only pay interest over their life, so the government still owes the initial principal when they mature. That principal has to be paid, usually by issuing new bonds, which will pay the new, higher prevailing rates. Average time-to-go for US government debt is something like 5 years[1], so that process moves pretty slowly. [1]: https://www.brookings.edu/blog/up-front/2022/07/27/projecting-the-structure-of-us-treasury-debt/ https://www.brookings.edu/blog/up-front/2022/07/27/projectin...
kevinventullo 4y ago
You can actually check for yourself: https://www.treasurydirect.gov/auctions/announcements-data-results/ https://www.treasurydirect.gov/auctions/announcements-data-r...
hindsightbias 4y ago
There will be pressure the day the markets think there is an alternative to the USD. Gold, silver, Euro, Yen, Bitcoin... they got nothing.

adam_arthur 4y ago

I haven't run the numbers, but cost of servicing the debt will depend on the structure of debt issued. A 30y treasury doesn't need to be refinanced/paid back for 30 years, 10y for 10 years etc. A smart Treasury would have locked in a lot of the debt in longer dated treasuries back when they were yielding 1% or less. This would have made the debt payments largely fixed, regardless of Fed hikes. Unfortunately from what I've heard, they are mostly financing through the fed funds/overnight rate. So yes, US debt service costs are more variable than they could have been. But maybe somebody can chime in with hard numbers

Ekaros 4y ago
Doesn't that also mean that carrying cost of debt now and while rates are up issued will carry these high rates for long time? Even if rates go back down.

dkjaudyeqooe 4y ago

Doesn't affect existing debt but as bonds mature they need to be replaced and that's when servicing costs go up. That happens all the time since bonds are always maturing, but there are different maturities (2, 10, 30 year) so servicing costs go up relatively slowly.

55873445216111 4y ago

Fed funds rate and total interest paid on outstanding treasury bonds are not a 1:1 relationship. The coupon payments of a bond are determined at the time of issuance. So for example if a 30 year bond was issued 10 years ago, the ongoing coupon payments that the US treasury is paying today on that bond are a fixed amount that was determined at the time the bond was issued 10 years ago. Every individual issuance of bonds has a specific coupon payment which is determined at time of issuance.

boole1854 4y ago

Very little pressure. https://fred.stlouisfed.org/graph/?g=UtqF https://fred.stlouisfed.org/graph/?g=UtqF Interest payments relative to federal tax receipts are at multi-decade lows. Some other important points to remember: - $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out. - Inflation has risen faster than rates have risen. This means federal tax receipts will likely rise faster than interest payments as well.

rank0 4y ago
> Interest payments relative to federal tax receipts are at multi-decade lows. It'll take some time before the current debt needs to be replaced at the higher rate. We've had artificially low rates for the past 14 years. I argue that spending 20% of tax revenue on interest alone is grossly irresponsible. We still need to pay out the face value of those treasuries too. > $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out. It "doesn't count" if you ignore the accelerating wealth disparity in our society.
- boole1854 4y ago
  > It "doesn't count" if you ignore the accelerating wealth disparity in our society. The parent asked about how interest rates affect the burden of servicing the debt. That is the sense in which it literally "doesn't count" -- interest paid by the Treasury to the Fed is returned by the Fed to the Treasury as distributed earnings.
missedthecue 4y ago
The federal reserve's remittances to the treasury are likely to be completely wiped out within the coming year. The reason is that the (low) interest it earns on its existing portfolio of government securities is fixed and will stay flat while the interest the fed pays out is rising sharply and will rise even further as rates increase. The fed is not rolling over its government debt portfolio into new debt at higher rates. Rather it is undergoing quantitative tightening selling off/allowing bonds to mature.

jnwatson 4y ago

Current average maturity of US debt is about 5 years. So, it won’t happen immediately; interest payments will gradually rise over the next several years.

JieJie 4y ago

I'm complete numbskull at economics, but I assume my bank is pretty good at it. They are absolutely thrilled for me to have a balance on my credit card of as much as I please (up to the debt limit), as long as I make my minimum payment each month.

ryathal 4y ago
Same is true for the US, but we don't know the limit. It could be 32T or 332T, either way when it gets hit bad things happen.

rank0 4y ago

That's an excellent question...absolutely it does! Not many people seem to pay attention to this fact. Every year we have a multi-trillion dollar deficit in our congressional budget. To make up this difference, the treasury department has to sell bonds. As the FFR increases, so do the yields on treasuries. Our annual interest payments on federal debt is ~400B. That's over HALF our military budget for some perspective. If inflation proves to be sticky, what happens if bond yields get pushed up to 10% ? Well, now congress has to borrow at 10% interest. That next 1T+ deficient would cost our country an extra 100B+ per year in coupon payments...AND we still owe the principle on those bonds when they expire. In the volcker era, we had to push interest rates up to almost 20%. Our government has been incredibly irresponsible with managing our debt. Problem is fixing it seems impossible. We'd need to increase taxes AND cut social services. Can you imagine how painful that would be? Any politician who tried to tackle this issue would become the most hated person in America.

kristjansson 4y ago

The fed rate is, roughly, the rate for new government borrowing. So newly issued bonds will have to pay higher prevailing rates. Also, most bonds only pay interest over their life, so the government still owes the initial principal when they mature. That principal has to be paid, usually by issuing new bonds, which will pay the new, higher prevailing rates. Average time-to-go for US government debt is something like 5 years[1], so that process moves pretty slowly. [1]: https://www.brookings.edu/blog/up-front/2022/07/27/projecting-the-structure-of-us-treasury-debt/ https://www.brookings.edu/blog/up-front/2022/07/27/projectin...

kevinventullo 4y ago

You can actually check for yourself: https://www.treasurydirect.gov/auctions/announcements-data-results/ https://www.treasurydirect.gov/auctions/announcements-data-r...

hindsightbias 4y ago

There will be pressure the day the markets think there is an alternative to the USD. Gold, silver, Euro, Yen, Bitcoin... they got nothing.