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Due to the unprecedented fiscal and monetary stimulus that the federal government has provided the U.S. economy during the COVID-19 pandemic, our federal debt has been rising precipitously. As we can see from this week’s chart, the federal debt as a percentage of GDP (left chart, purple bars) skyrocketed in 2020. In the meantime, interest rates have declined, shown using the bellwether 10-year U.S. Treasury yield (left chart, orange line). Rates have declined because of haven asset-seeking from investors, driving up Treasury prices and driving down yields, as well as from developed market foreign investors seeking relatively higher yields here versus low to negative yields in their markets.
Because of the decline in rates over 2020, the federal gross interest expense on U.S. Treasury securities (right chart, purple bars) has been declining. The federal gross interest expense rate (right chart, green line), based on dividing the federal gross interest expense dollar amount by the total federal debt outstanding dollar amount, has been declining along with the 10-year U.S. Treasury yield (right chart, orange line), but there has been a lag. This lag comes from newly issued, on-the-run bonds having lower yields versus existing bonds that are off-the-run, on which the Treasury is paying interest. These two charts emphasize that despite the rise in federal debt, our government is benefitting from a decline in the interest costs due to lower interest rates. This should help mitigate the total costs of supporting the U.S. economy as we recover from the COVID pandemic.
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