PLW - Federal Debt And Interest Rate: A Complicated Story

Summary

• Real interest rates have been on the decline for decades.
• Foreign governments and investors bought US bonds to manage their currency and because it was seen as a safe asset.
• This may cause problems for financial markets that have become accustomed to zero interest rates and for the US government that rolls over its sizable debt.

By Allison Schrager

Real interest rates have been on the decline for decades. There are many reasons why, but a big one is there have been many captive buyers of US federal debt. Foreign governments and investors bought US bonds to manage their currency and because it was seen as a safe asset. But their appetite soured in the last few years, as inflation increased and they have their own fiscal problems. At first, this did not seem to impact rates because the Fed bought lots of bonds as part of its massive QE program during the pandemic. But now the Fed is tightening, leaving fewer buyers for US debt. This suggests rates may be higher even if inflation moderates. This may cause problems for financial markets that have become accustomed to zero interest rates and for the US government that rolls over its sizable debt.

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