logo
  Join        Login             Stock Quote

Lower For Longer

 January 14, 2013 01:43 PM


When other fears fade, it seems US debt concerns often rise anew, particularly in our currently debt-phobic, skeptical world. After all, the recent Fiscal Charade—err, we mean "Cliff"—was at root a debate between two parties that each presume our debt is hugely problematic and must be reduced. They merely disagreed (and will disagree) on the means. In addition, it seems we have another showing of the US debt ceiling's political theatre underway now.

But all these are just derivatives of fear of the debt itself. Headlines shriek of deals that solve nothing, assure eventual insolvency, burden our children or represent quick roads to become Grecian. However, when you take a broader look at the US's debt, it's hard to reach the conclusion we have much of a crisis.

[Related -CONN'S, Inc. (CONN) Q2 Earnings Preview: The BIG Move Quarter]

Exhibit 1 cuts right to the heart of the matter, showing net debt interest payments' share of US federal tax revenue. Currently, that level is roughly 9%—a level easily met in the past and lower than the entirety of the 1980s and 1990s.

Exhibit 1: US Net Debt Interest Payments as a Percent of Federal Tax Revenue

[Related -Three Stocks to Consider in a Hot Sector]

Source: Federal Reserve Bank of St. Louis, accessed on 1/8/2013.

Several major factors combine to determine the affordability of our debt. For example, Exhibit 1 comprises three major data points: tax revenues (determined by economic activity and tax policy), government spending (current and past) and interest rates on the debt.

One key factor in our currently easily affordable interest payment load is multi-generational low interest rates exist across the entirety of the Treasury curve. Which might beg the question: What might happen if they rise? The answer is: in the near term, probably not much. Here's why.

With rates so low, the Treasury has embarked on a strategy pushing the maturities of Treasurys longer. (See Exhibit 2.)

Exhibit 2: Weighted Average Maturity of US Debt

Source: Bloomberg, LP, as of 1/8/2013.

The weighted average maturity across all US Treasury debt is now 64.6 months—over five years—essentially meaning it would take years for the full effect of rate changes to be felt. It also means Treasurys still haven't experienced the full impact of recent years' declining rates. Consider, today's roughly 2% 10-year Treasury rates are fully 200 basis points lower than a decade ago—so a maturing bond today is refinanced at rates roughly half as high. Similarly, five-year Treasury rates—near the average maturity of US Treasury debt—were at 1.18% at the end of 2012, also about 200 basis points lower than five years earlier.i And this is nothing new—we've been refinancing bonds at lower rates for many years.

And it would take quite an upward move in interest rates for that to change soon. Currently, five- and 10-year bond rates would have to more than double for Treasury refinancing to result in higher per-bond interest costs. And it's important to note that even if Treasurys were refinancing at higher levels, that wouldn't necessarily cause an affordability pinch.

As we mentioned, other factors could change, impacting the affordability of our debt. But when you consider the totality of the situation, there's just next to no sign our debt is anything resembling a timely problem.



iSource: Federal Reserve Bank of St. Louis, as of 01/11/2013.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageXerox Corp. (XRX): An Insider’s $500,000 Insider Buy

Last week was a healthy week of insider buying as 194 companies reported purchase records. The number read on...

article imageQihoo 360 Technology Co Ltd. (QIHU) Q2 Earnings Preview: A Green Monday

Qihoo 360 Technology Co Ltd. (NYSE:QIHU) will report its second quarter 2014 financial results on Monday, read on...

article imageSix Stocks that Could Outperform in the next 90 days

Earlier today, Goldman Sachs put out its list of the 50 stocks that Matter Most. It’s a list of the 50 read on...

article imageFoot Locker, Inc. (FL) Q2 Earnings Preview: Running Past the Street View

Foot Locker, Inc. (NYSE:FL) plans to report financial results for its second quarter ended August 2, 2014 read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.