Tags: interest | rates

Rising Interest Rates Would Increase Government Debt

Friday, 10 Jul 2009 03:01 PM

By Dan Weil

Interest rates on long-term Treasury bonds have risen sharply from last year’s lows, and if rates keep on rising they could hurt the government dearly.

That’s because the additional money it would have to spend on interest payments would boost its debt burden. And that burden already is exploding thanks to the huge budget deficit.

The Congressional Budget Office currently predicts that the government’s net interest payments will fall in one-third this year, to $170 billion, The Wall Street Journal reports. The CBO also expects those interest obligations to stay about the same next year.

Those projections, of course, are based on the assumption that interest rates will stay low. But already the 10-year Treasury yield has risen to 3.27 percent from just over 2 percent in December.

Short-term Treasury rates are close to zero, which has helped push the cost of government debt down.

But Treasury bill rates won't stay near zero forever, unless the economy stays weak for a very long time, The Journal points out.

The CBO now predicts the government’s interest bill will total $1.5 trillion for the 2010-2014.

But it estimates that if Treasury yields return to the average levels of the 1990s by 2014, you can add another $500 billion to that bill.

Many economists see the country’s debt growth as our biggest danger. “The magnitudes are very worrisome,” John Taylor, an economic official in both Bush administrations, tells The New York Times

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