Low US Treasury Rates Won’t Last Forever

As of Wednesday, July 25, 2012, yields and Spanish ten-year bonds were at 7.74% and two-year yields were at 7.10% and Italian ten-year bonds were not far behind at 6.44%. If interest rates rise and the United States requires a bailout, no one knows what will happen – maybe recession, maybe hyper-inflation – but the one thing we do know is that we will have to fend for ourselves, as there is no one big enough to bail us out.
Unfortunately, “The United States has the least balanced maturity schedule of any major nation. Over 70% of its Bonds mature within five years, compared with an average of 49% for the 34-member countries in the OECD.”
Thus, our government’s finances are in a much more precarious position than most countries, as interest rates begin to rise.
The size of our 15.4 trillion dollar National Debt is a big problem. Additionally, for each of the last three years we have run a Federal Deficit of approximately 1.3 trillion dollars. Adding 1.3 trillion dollars per year to our National Debt certainly isn’t helping the problem.

Clearly, our country’s finances are not in good shape. However, if interest rate were to merely increase to historical levels, the result would be dramatic and could be disastrous. For example, one year daily yield curve rates, as of trading July 13, 2012, were 0.2%, and five year rates are 0.63%. 

Compare these rates to the rates in 2000. On July 13, 2000, the one year rate was 6.07% and the 5 year rate was 6.15%. This means that the one year rate was approximately 30 times higher than today, and the five year rate was approximately 10 times higher than today. Eventually, one day our interest rates will rise, and if we have not taken preventative action, the results could be devastating.

If, however, the United States got its fiscal house in order, then the markets and the world would have even greater confidence in the United States, which would further lower our long-term treasury rates, which are already low: 30 year rates as of July 13, 2012 are only 2.5%. More importantly, it would give us the market support needed to enable us to refinance our short-term maturities with long-term maturities and thus, replace our short-term debt with long-term debt.

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