According to an article published on Bloomberg.com yesterday, the US national debt is now $10.7 trillion, up from $9.15 trillion just one year ago.
That’s a staggering increase of $1.55 trillion in just twelve months, meaning that the outflow from the US Treasury is greater than the inflow by about $129 billion per month. Broken down further, it’s downright depressing:
· $4.3 billion per day in negative cash flow
· $179 million per hour in negative cash flow
· Almost $3 million per minute in red ink
· Approximately $50,000 per second in money that we don’t have
That means in the short time that it’s taken you to read this, we, as a country are in debt another $2.5 million.
In order to finance all of this red ink, the US Government is forced to sell debt in the form of Treasuries. You’d think with all of this debt and projections of an operating deficit of one trillion next year, investors in Treasuries might be getting skittish, concerned about the US Government’s ability to repay the debt.
So far, that hasn’t happened.
According to the article posted on Bloomberg yesterday, demand for US Treasuries is continuing to increase, with foreign banks and other institutions accumulating treasuries at a pace faster than any time since 1988, increasing their holdings 12% since September.
Due to this demand, the yield of the benchmark 2-year Treasury note dropped to .76% last week, down from the June peak of 3.11%.
Barr Segal, managing director at TCW Group, “This is not about return and yield and value, investors are functioning out of raw fear.”
In short, investors don’t know where to park their assets, so they’re running scared to US Treasuries.
This investor fear is good news for the US Treasury, allowing it to borrow at extremely low interest rates – a good thing considering the massive debt it’s managing.
But what happens if the world changes its view on US Treasuries and decides there’s a better place to park its ‘safe money’?
Undoubtedly, in my opinion, you’ll see interest rates rise. And, given the current state of the economy and massive debt levels, I believe that day is not too far off.
Think about this.
If the US is carrying debt of $11 trillion by the middle of 2009 and financing that debt at fairly low interest rates, a mere 1% increase in interest rates would raise the deficit by $110 billion, a 2% increase would increase the operating deficit by $220 billion and a 4% increase would increase the deficit by $440 billion.
Is this in the realm of possibility?
According to the Bloomberg article, the median estimate of 49 economists has the 10 Year Treasury yield ending 2009 at 3.65%; that’s a difference of 3.26% (top the low side) from the average yield over the past 45 years. With the level of US debt currently, it’s my opinion that a yield greater than the average will need to be offered to investors at a future date in order to entice them to invest and finance the United States’ debt.
That could bring the deficit to well over a trillion when considering rising interest rates.
So what will this mean for investors?
I believe rising interest rates and a falling US Dollar will require the use of alternative investments and the abandonment of traditional ‘buy and hold’ asset allocation strategies. For more information click here: www.usawealthmanagement.com
What about borrowers?
If you or someone you know has an adjustable rate mortgage or is going to have to finance debt for a long period of time, locking in a low interest rate today in order to finance that debt makes a lot of sense.
Hopefully, our politicians do the same thing with the US Debt – but don’t bet on it.
Securities offered through USA Advanced Planners (Member FINRA/SIPC). Advisory services offered through USA Wealth Management. USA Advanced Planners and USA Wealth Management are affiliated companies. The opinion expressed herein is that of the writer and not necessarily that of USA Wealth Management and/or USA Advanced Planners.
· Investing in market related securities involves a risk of principal loss. Having a particular investment strategy does not guarantee a profit and/or guarantee against loss as no investment strategy will be 100% accurate. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal financial situation
of each individual investor.
