Rising bond yields lower costs of deficit spending since 2005 for U.S.

At a time when yields on U.S. bonds are increasing at the fastest pace in over a year, the amount the government pays to service its record deficit is the lowest since 2005, compared with the size of the economy.

While interest costs rose 8 percent to 414 billion U.S. dollars in the fiscal year ended September 30, 383.4 billion U.S. dollars in 2009, fell to 2.7 percent of gross domestic product 3 1 percent, data from the U.S. Treasury Department shown. That is the lowest in five years, when he was the same percentage, and below 3.6 percent in 2001, when the U.S. had passed a budget surplus.

Yields on benchmark 10-year Treasury rose last week by the most since August 2009. Bond prices fell as a President Barack Obama agreed to extend the tax cuts of the Bush era showed that the government is willing to increase the deficit to decrease the unemployment rate at the same time, the Fed prints money to avoid deflation.

"It's a turning point when the cost of interest on government debt starts to rise because the amount of the debt is so high," said Phillip Swagel, assistant secretary for economic policy at the Treasury in 2007 and 2008 now a professor at Georgetown University in Washington. "Prices are still quite low. But at some point the costs of growing interest is going to be forcing more action in this matter."

Adding to debt

The agreement between Obama and Senate leaders set the estate tax at the lowest rate in 80 years, expanded unemployment benefits and reduce payroll taxes by 2 percentage points. The proposed legislation would add 857 billion U.S. dollars to the federal debt over 10 years, government analysts.

On 7 December, the day after Obama announced the tax agreement, demand a government auction of $ 32 billion in bonds to three years was the least since February. The Treasury said it received $ 2.91 in bids for every $ 1 of the notes sold, $ 3.26 below the previous month.

ten-year yields rose 31 basis points last week, or 0.31 percentage point, the highest since August 2009. The benchmark 3.37 percent as of 13:53 gave in Tokyo, according to BGCantor Market Data, the highest since June. The guarantee of 2,625 percent, due November 2020 fell 03/08, or $ 3.75 per $ 1,000 face amount, to 93 3 / 4.

Even with the increase, yields are still more than two percentage points below the 5.44 percent average of the last two decades. The average Treasury notes and bonds fell to about 1.90 percent on December 10 from 2.07 percent a year ago, according to U.S. Bank America Merrill Lynch Treasury Master Index.

Yield forecasts

ten-year yields will be little changed at 3.30 percent late in the third quarter, according to the median estimate of more than 60 economists and strategists surveyed by us. bond yields to two years may reach 1 percent from 0.68 percent, according to the survey.

"The deficit situation will improve as growth in the long term improvement," said Jeffrey Caughron, an associate member in Oklahoma City at Baker Group LP, which advises community banks on investing assets totaling $ 23 billion million. "Bond yields move back to the range we've seen over the last 12 to 18 months, but will not move much higher."

Obama has focused on his economic team to begin analyzing options for revising the tax code U.S. to help cut the long-term deficit, a government official said Dec. 10. No decisions have been made about the options or a deadline for the submission of a plan to lawmakers, said the official, who spoke on condition of anonymity because no official decision has been taken.

Increased costs

Interest paid by the Treasury to service debt in the first two months of fiscal 2011 rose 6.9 percent to 43.5 billion U.S. dollars from 40.7 billion in the period a year earlier, partly because the government has taken advantage of historically low borrowing costs to sell more-and date values.

The average maturity of marketable U.S. Treasury debt rose to 59 months from 49.4 months in March 2009, while outstanding increased 25 percent to 8.75 trillion U.S. dollars in November to 7.01 trillion U.S. dollars at the end of fiscal 2009, according to government data.

"Treasury will still be a huge debt and interest rates are off the lows," said Ward McCarthy, chief financial economist in New York, Jefferies & Co. "There's a good chance that interest expense continue to increase, which is a result of massive budget deficits that are running these days. "

Fiscal Deficit

Economists in New York, Morgan Stanley draft fiscal 2011 deficit will total 1.295 trillion U.S. dollars, assuming that the tax plan is carried out, compared with $ 1.3 billion in the year ended 30 September. That would amount to 8.6 percent of GDP, based on the company's forecast economic growth. The total deficit of 1.11 trillion U.S. dollars, or 7 percent of the economy in 2012, they said.

At the beginning of the year, Morgan Stanley expects 10-year yields to reach 5.5 percent in late December. Now the company says it can only go up to 4 percent in late 2011.

The deficit increased from 455 billion U.S. dollars in 2008 due to government programs to lift the economy from its worst recession since the Great Depression. U.S. sales Debt rose to a record 2.15 trillion U.S. dollars this year of 2.109 trillion U.S. dollars in 2009.

Bond yields fell, with the rate of 10-year Treasury hit bottom in the 2.33 percent in October, when the consumer price index excluding food and energy rose 0.6 percent from the previous year the smallest increase in history. Is now increased speculation the Fed plan to buy $ 600 billion of U.S. debt to June will help raise the economy and inflation.

Pimco Outlook

Bill Gross, who oversees the largest bond fund at Pacific Investment Management Co., said in October that the purchases of assets from the Fed will probably mean the end of 30-year bull market in bonds. The fiscal stimulus will help expand the economy as much as 3.5 percent next year, according to Mohamed El-Erian, chief executive of Pimco, which oversees 1.24 trillion U.S. dollars. That compares with 2.2 percent gain expected this year by the International Monetary Fund.

"The U.S. is using the fiscal and monetary policy to try to reach the escape velocity for the economy," El-Erian said in a telephone interview on December 9, Newport Beach, California. "We do not know if that will still not be enough just to change the trajectory of the economy for a year, but to put on a medium-term sustainable path."

Gross domestic product expanded at a rate of 2.5 percent in the third quarter, according to a government report on 23 November. Then, on 3 December, the Labor Department said the unemployment rate rose to 9.8 percent in November, the highest since the 9.9 percent in April.

Bond Losses

the U.S. government debt lost 3.4 percent on average, including reinvested interest, since Treasury yields bottomed out 10 years on 8 October, according to the rate of Bank of America Merrill Lynch. That compares with a total yield of about 7 percent for the 500 Standard & Poor's.

The five-year, five years forward equilibrium rate the Fed uses the picture of investor expectations for inflation rose to 3.09 percent last week from a nearly two year low of 2.18 percent on 24 August. The average rate of 2.6 percent in the five years before the start of the financial crisis.

"All the talk about deficit has reawakened bond investors to understand that we have a serious problem in the long term," said Robert Litan, a senior fellow at the Brookings Institution in Washington and former deputy director of the Office Management and Budget in 1995 and 1996.

"It was not the behavior of the bond market ostrich with people who think well the deficits do not matter, '" he said. "The rise in yields is a natural correction as we had a semi-market bubble-link in advance with interest rates too low for too long."