Tyranny Of Labels

So what am I worried about?

Let’s examine each interest cost determinant and see.

The outstanding debt of the government. Charted below is the 50-year record in U.S. government debt outstanding:

I would call this high and rising levels of debt, wouldn’t you? At $12 trillion, the U.S. government’s debt is at a 50-year high. What’s more, with deficit spending largesse becoming more and more the order of the day in Washington, first led by President Bush and now led by President Obama, U.S. government debt has been growing at an annual rate of 8.5% since 2000, with 2009 debt outstanding up a whopping 19% from 2008. And as for the future, trillion dollar deficits and trillion dollar borrowing needs are as far as the eye can see. Not good.

The interest rate paid on that debt. Now, take look at the 50-year record in 1 year, 5 year and 10 year rates on U.S. government treasury notes:

Rates are at 50-year lows and by the looks of it have nowhere to go but up. And higher rates of interest do mean a higher interest cost, don’t they?

The maturity distribution of that debt. Finally, cast your eyes on the average years to maturity on the government’s marketable debt:

Although not at historical lows, at 4 years, the average maturity on the government’s marketable debt is down 35% from the 2000 high and in the bottom 40% of this study. That means a whole heap of debt refinancing is in the offing. In fact, the government must refinance a huge $2.6 trillion of its debt in fiscal 2010 and $4.7 trillion of its debt in the next five years. This in addition to projected deficits conservatively estimated by the Obama administration at $1.6 trillion in fiscal 2010 and a mega $5.7 trillion over the next 5 years.

Simply said, for the sake of the U.S. government’s financial condition, with these debt refinancings in the offing, interest rates better stay at historical lows.

Let’s put this all together and see what we have:

Now do you see what worries me, and should worry every U.S. treasury note buyer in the world? That’s right, rising interest rates.

To underscore the importance of these historically low interest rates to the U.S. government’s financial health, let’s have a look at the ability of the government to cover its interest cost with government receipts, in financial circles termed the coverage ratio: