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How'd you like to borrow money for 30 years at 2.95%?The U.S. government can, and it's making it easier for the federal government to fund its increasing budget deficit, as well as help build the case for a large fiscal stimulus package.
Treasury prices continued to rise Tuesday, pushing the yield on the 30-year government bond down to 2.95% -- close to its lowest level since regular sales began in 1977. The 10-year note yielded 2.48%; the 5-year note, 1.47%.
Further, while it may seem like a contradiction to have long-term interest rates fall at a time the U.S. government is on-track to record at least a record $600 billion (and probably much higher) budget deficit this fiscal year, there's a method to institutional investors' madness, so says economist Richard Felson.
"The landscape for private investment is poor. We have a recession on all continents, and there's a lack of places to deploy capital productively. That dearth of opportunities for return on investment plus fear of losses from toxic assets is driving investors to the safer investments, and one of the safest is the U.S. Treasury," Felson said. "It's the preferred place to be until the major economies start to recover."
The prime beneficiaries of the above flight-to-safety? The U.S. government and taxpayer. "The need for preservation of capital is enabling the U.S. government to fund its borrowing at an extraordinary low cost, which is reducing the interest cost to taxpayers. It's conceivable that the federal government could lock-in $1 trillion in new debt for less than $37 billion in interest per year, after averaging all borrowing rates. There's no way the interest payment would be that low if the global economy was growing, so the U.S. is quite fortunate."
Further, the low interest rate is also helping to make the case, indirectly, for a large fiscal stimulus, Felson said. "If interest rates were higher, opponents of the Obama fiscal stimulus plan would be screaming about the federal government's annual interest cost for the debt," Felson said. "Low rates have muted that argument, which has eased the way for a large fiscal stimulus package, which is what the U.S. economy needs."
Fiscal Policy / Economic Analysis: Once again, the United States benefits in ways no other modern country could. How many modern nations have dramatically increased their national debt and experienced a decrease in bond interest rates? To be sure, interest rates will rise after the U.S. economic recovery starts, and taxes will have to be raised to lower the budget deficit and reduce the total amount borrowed per year, but for now the U.S has a window via which it can fund its fiscal stimulus package that's so essential to getting the economy growing again.
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