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Global Financial Data is a firm that maintains a big database the records lots of economic data going as far back as the year 1168. The firm recently produced the following chart showing the interest rates that the U.S. government has paid to its creditors on 10-Year debt securities issued by the U.S. Treasury since February 1790.
While the Wall Street Journal recently published a version of this chart, this particular chart was featured on Barry Ritholtz’ The Big Picture blog, on the historic occasion that the yield, or interest rate, that the U.S. government is paying on the newest 10-Year Treasury securities that it issues has dropped to an all-time record low of 1.367%.
Perhaps the most immediately relevant explanation is the third option, because of the increase in global financial instability that has occurred following the U.K.’s recent popular referendum in favor of exiting from the European Union, which was subsequently followed by much worse financial news in that large banks in the EU nations of Germany and Italy are teetering on the edge of insolvency and are at a heightened risk of failing.
The U.S. government currently benefits from that increase in financial instability as global investors are fleeing risks in a flight to safety, where their desire to avoid losses is helping to push the interest rates that the U.S. government pays on the money it borrows from them lower than it ever has been before. That flight to safety is making the U.S. government’s $19.36 trillion total public debt outstanding relatively more affordable.
That benefit can be seen in the portion of the national debt that the U.S. Treasury is effectively rolling over, replacing debt it previously issued that paid much higher interest rates with newly issued debt that pays much lower interest rates. Ten years ago, these debt securities paid the U.S. government’s creditors a yield of 5.19%. Today, the yield for the same 10-year maturity for U.S. Treasuries is 1.37%.
For every $1 million in debt that it can roll over at these lower interest rates, Bankrate.com’s loan calculator the equivalent monthly payments that the U.S. government makes to its creditors through 10-year Treasuries securities drops from $10,699.67 to $8,921.95, a monthly savings of $1,777.72, or annual savings of $21,332.64.
According to the U.S. Treasury Department, nearly $1.2 trillion of the national debt that matures in 2016 was issued in the years from 2006 to 2009. Assuming similar savings apply, rolling over just that portion of the national debt into new 10-year Treasuries will reduce the U.S. government’s cost of borrowing by $25.6 billion per year.
Should interest rates rise however, those benefits will immediately begin shrinking and can reverse, turning the existing national debt that must be continually rolled over into a time bomb. Considering the 226 year history of the interest rates that the U.S. government has paid for the privilege of borrowing money, there is no evidence to suggest that the current trend avoiding that fate can be sustained indefinitely.