Tags: Investors | Paying | Lend | Government

NY Times: Investors Effectively Paying to Lend to Government

Tuesday, 28 Feb 2012 01:44 PM

The cost of borrowing is now so low that many investors are effectively paying to lend money to the government, The New York Times reports.

“We are in an unusual period right now in which net interest expense is temporarily depressed,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech last week. “This will not last.”

Investors buying five-year federal debt are accepting such low interest rates that inflation is on pace to reduce the value of their investments by more than 1 percent each year. Yet demand for United States Treasurys remains much greater than the supply.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

This glut of cheap money has allowed the government to keep its annual deficits much smaller than it had expected, holding down the growth of the federal debt and making this the best of times for the world’s most gluttonous borrower—the United States.

So, while the size of the public debt more than doubled over the last five years, from less than $5 trillion to more than $10 trillion, the government’s annual interest payments have remained about the same, leading Dudley to warn that this may lead some to underestimate the long-term cost of the debt when rates inevitably rise.

The administration’s recent budget projects that rates will increase gradually over the next decade, including about 1 percentage point this year.

If the increase is just 1 percentage point larger this year, the deficit will grow by $13 billion. If the same higher trajectory holds over 10 years, the additional interest payments would approach $1 trillion.

The International Business Times reports that the U.S. Treasury Borrowing Advisory Committee, which brings together dealers and Treasury officials, have unanimously agreed that the Treasury should start permitting negative interest rate bids for T-bills.

In other words, newly issued T-bills from the Treasury would offer investors a guaranteed negative return if held to maturity.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Tuesday, 28 Feb 2012 01:44 PM
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