About This Source - Bloomberg QuickTake: Now
Bloomberg L.P. is a privately held financial, software, data, and media company headquartered in Midtown Manhattan, New York City.
It was founded by Michael Bloomberg in 1981, with the help of Thomas Secunda, Duncan MacMillan, Charles Zegar, and a 12% ownership investment by Merrill Lynch.
Recent from Bloomberg QuickTake: Now:
Bloomberg Quicktake: Now published this video item, entitled “How Much Does the Size of the U.S. Debt Actually Matter?” – below is their description.
As rising government bond yields stir up angst on financial markets, one person who sounds unfazed is U.S. Treasury Secretary Janet Yellen. Her own go-to measure of debt costs is headed in the opposite direction.
Interest payments on the national debt fell last year, to $345 billion or 1.6% of gross domestic product. They’re on track to shrink further in 2021 — even after all the pandemic spending, plus a debt-market selloff that’s taken 10-year Treasury yields to the highest in more than 12 months.
That’s because the government is rolling over bonds it sold years or decades ago, when its borrowing costs were higher. It would take Treasury yields averaging about 2.5% across all maturities — well above where they are now — to turn that trend around, according to calculations by Bloomberg Intelligence. Even then, U.S. debt service costs would be comfortably lower than they’ve been in the recent past.
All of this helps explain why President Joe Biden’s administration, which just passed a $1.9 trillion pandemic relief bill, is lining up trillions of dollars more spending to help infrastructure and industry — and isn’t concerned if it has to borrow a chunk of the money.
Public spending to counter the pandemic has already taken U.S. debt to a post-World War II record. And the cost of new borrowing has jumped. Ten-year yields were trading at 1.61% as of 3 p.m. on Tuesday — double what they were as recently as November. The increase has been driven by expectations of faster growth and inflation, as vaccines enable a consumer rebound from the pandemic slump.
But Yellen says that the size of the government’s interest payments are the best guide to how much spending room there is. As a share of the economy, those outlays are “no higher than they were back in 2007,” she told ABC’s “This Week” on Sunday — even though the national debt is more than twice as big as it was back then.
By Yellen’s preferred measure, “we are not in a troublesome zone,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
That doesn’t mean there are no potential problems ahead.
Sooner or later, U.S. debt service costs will likely start rising again. The Congressional Budget Office doesn’t expect it to happen until 2025, after interest payments bottom out at 1.1% of GDP, the lowest since at least the early 1960s.
That projection is based on the assumption of a gradual rise in 10-year Treasury rates of about 20 basis points a year, from 0.9% in 2020 to 1.5% in 2023. By contrast, in the past few weeks alone, yields have surged some 70 basis points. The CBO, which has consistently overestimated interest rates in the past decade, could be wrong in the other direction this time.
Analysts at Goldman Sachs Group Inc. predict a steeper climb in yields, with the 10-year rate ending this year at 1.9% and climbing to 2.4% in 2024. Even so, that would “leave debt-servicing costs well within the normal historical range,” Goldman economists Laura Nicolae and Ronnie Walker wrote in a March 10 report.Bloomberg Quicktake: Now YouTube Channel
Got a comment? Leave your thoughts in the comments section, below. Please note comments are moderated before publication.
In This Story: Goldman Sachs
The Goldman Sachs Group, Inc. (NYSE: GS), is an American multinational investment bank and financial services company headquartered in New York City. It offers services in investment management, securities, asset management, prime brokerage, and securities underwriting.