Is the US Government’s Interest on Debt Spiralling out of Control?

In the United States the annual debt interest they pay on Treasury Bills (US Treasuries) has doubled in the last 9 months, and recent figures released shows that debt interest has passed the USD1 Trillion mark as of the end of October 2023. This figure is representative of 15.9% of the entire United States Federal budget for the 2022 fiscal year, which totalled out as USD6.272 Trillion. 

The heavy borrowing coming from Washington DC has driven up bond yields amid worsening metrics, and such borrowing was responsible for the credit agency Fitch to downgrade government debt back in August of this year. The upward shift in interest rates has put the United States government in a position of having to pay more on interest payments in the coming years than was originally calculated.             

Before the Covid-19 Pandemic no one anticipated that interest rates would go so high, and unless interest rates return to their pre-pandemic levels, interest rate debt will spiral out of control. In fact, experts predict that by 2026 the government’s net interest expense may well be 3.3% of Gross Domestic Product (GDP), which will be a new record being the highest ever recorded. 

As an example of how interest rate debt is spiralling out of control, in October 2023, data released showed that circa USD207 Billion in Treasury notes matured, these notes were issued in 2013, 2016, 2018, 2020, and 2021. Calculations carried out by respected analysts show that the weighted average interest rate* was 1.2%. These notes will be replaced by newly issued debt at an average rate of 5%, and the same will happen every month, (though the amounts will differ) for many months to come. 

*Weighted Average Interest Rate – This represents the aggregate rate of interest paid on all debt in a measurement period. The formula for calculating the weighted average interest rate is,

                         Aggregate Interest Payments ÷ Aggregate Debt Outstanding 

                                              = Weighted Average Interest Rate  

However, things may be looking up for the US government as along with the European Central Bank and the Bank of England, the Federal Reserve announced on 2nd November 2003 that it would keep Overnight Federal Funds steady, which is the second consecutive meeting where rates have remained unchanged. Many operators in the financial markets believe that rates will come down in the new year, which will lighten the load on debt interest payments. However, the Chairman of the Federal Reserve warned that if inflation stops declining he reserves the right to increase rates again, thereby increasing the burden on debt interest repayments.