While rates are low …

US Ten Year CMT Yield compared to US Total Debt Service, 1988 to 2012

Talk of the debt ceiling and attempts to abolish it are troublesome since folks tend to not look at the bigger picture.

The chart above shows the cost of servicing US Federal Debt ( red bars )1 compared with the benchmark, US 10 year interest rate ( black line )2 from 1988 to 2012. Clearly interest rates have been declining, falling from a sample high of 9.21% in 1989 to a low of 2.04% in 2012, and here is the concern: looking at the bigger picture, we see the long run average rate of interest for ten year debt for the period 1962 to 2012 is about 6.63%. Further, we know that many data series, interest rates included, tend to revert to the mean; in other words, return to their long run average. The chart below shows US Ten Year interest rates over the period 1962 to 2012; clearly we are in a period of relatively low interest rates. For how long is anyone’s guess.

US Ten Year CMT Yield, 1962 to 2012

US Ten Year CMT Yield, 1962 to 2012

The effect of sharply higher interest rates upon debt service is obvious; both will increase. Unfortunately The United States is increasing the amount of debt outstanding, effectively betting that interest rates will stay low.



Source:

1

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm



2

http://research.stlouisfed.org/fredgraph.png?g=f2p

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