Federal Debt Rises but Federal Interest Expense Drops

February 18, 2021 | Mollie Zugger, Research Associate, Ben Mohr, CFA, Director of Fixed Income, Managing Partner

Two column/line charts showing federal debt and federal gross interest expense. Chart subtitle: Despite rising federal debt, U.S. government is benefiting from decline in interest costs. First chart description: Left y-axis for columns shows Federal Debt as % of GDP with range of percentages from 0-140%. X-axis shows years 2010-2020. Right y-axis for line shows 10-Year U.S. Treasury Yield with range of percentages from 0-3.5%. In 2020 the federal debt column is at its highest level but the 10-year is at it's lowest. Second chart description: Left y-axis for columns shows Federal Gross Interest Expense on U.S. Treasury Securities with range of 0-$700 billion. X-axis shows years 2010-2020. Right axis for lines shows range of percentages from 0-3.5%, used for both 10-Year U.S. Treasury Yield and for Federal Gross Interest Expense Rate lines. In 2020 both lines show a significant decrease, and the Interest Expense bar is also lower than 2019. Note: Latest available 3Q20 Federal Debt as % of GDP used as proxy for 4Q20 Federal Debt as % of GDP. Chart sources: Congressional Budget Office, Office of Management and Budget, U.S. Treasury, Federal Reserve.

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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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Mollie Zugger
Research Associate

Get to Know Mollie

Ben Mohr, CFA
Director of Fixed Income, Managing Partner

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