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Total U.S. federal debt has increased by nearly $3 trillion in eight months compared to $1.2 trillion last year…[so] you would think the interest expense would have also increased….[but, in fact,] the U.S. Government has paid less in interest expense…[than] during the same period last year.
Q. How did the U.S. Government get away with paying less interest expense on $3 trillion more debt?
A. Because the interest rate on the debt declined significantly over the past 12 months.
The average interest rate on U.S. public debt in May 2019 was 2.50% compared to 1.84% in May 2020, highlighted in (YELLOW).
However, the biggest factor that pulled down the average interest rates was the change in the rate of U.S. Treasury Bills highlighted in BLUE. The Treasury Bill’s interest rate fell from 2.47% in May 2019 to 0.40% in May 2020. That’s a massive decline in the interest expense paid to Treasury Bill holders.
When we look at the next chart, we can see that in May 2020, the outstanding U.S. Treasury Bills, which accounted for $4.6 trillion, was 45% of the $10.2 trillion of Treasury Notes but the total interest expense paid during Oct-May from these Bills was only $26 billion (18%) compared to $141 billion paid from the outstanding Treasury Notes. Simply put, with total U.S. Treasury Bills being a little less than half of the Treasury Notes, the interest paid on these Bills was only 18% of the Notes.
Of course, the falling interest rate on the Treasury Bills was partly due to the enormous Stock Market sell-off as investors moved out of stocks and into Treasuries for protection.
The Treasury Bill interest rate should have bottomed in March to coincide with the bottom in the U.S. stock indexes. CORRECT? NOPE. Here are the Treasury Bill’s interest rates for the past five months:
Treasury Bill’s Interest Rate:
- Jan 2020 = 1.68%
- Feb 2020 = 1.64%
- Mar 2020 = 1.22%
- Apr 2020 = 0.60%
- May 2020 = 0.40%
One would think that, with the Dow Jones Index roaring back from a low of 18,200 on March 23rd to a high of 25,750 at the end of May – a staggering 41% increase, that the Treasury Bill’s interest rate would head back higher, and it would have done that if the Federal Reserve wasn’t buying trillions of U.S. Treasuries but, with the Federal Reserve adding Treasuries to its balance sheet, that has kept the Treasury Bill’s interest rate artificially low, thus paying Bondholders less for holding the debt…
Editor’s Note: The original article by SRSrocco has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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