Straight into a wall?
It has been an interesting year in the bond markets and last week was particularly intriguing.
The popular view of a lowering of rates late this year slowed down and became less vocal. Instead, we saw the first broad front page WSJ view of a scenario with much higher rates, maybe 7% or more. The article essentially posed a very good question of “is your business ready for a 7% environment?”.
As households, you must do this analysis every week or month. Can I afford Starbucks, should I buy chicken or pasta this week, what should I trade down, what can I do without if needed? Families have to make it through on their own. You have learned financial responsibility (at least some have). It is an ongoing dynamic process depending on your current and expected earnings and your C&E expenditures/savings.
Looking at the Federal Government, you’d expect at least some of the same rationality. But we don’t have this – in fact we have an ignorance, maybe intentional disregard, for some pretty ugly situations.
We haven’t caught up yet to the rapid rise in rates that started during 2022. Remember, this data below is backward looking.
Right now, if rates stay at roughly the same level, we are looking at payments on the Interest Only portion of more than $1 Trillion a year – a number most Americans can’t fathom.
At a 7% potential rate as brought up in the journal, it would probably be approaching $1.5T/year. The government doesn’t have this money. This situation creates a lot of follow-on effects across multiple industries. It isn’t an isolation situation as it impacts currencies, financing of all types of assets, and households tremendously.
From: Federal Debt: Total Public Debt (GFDEBTN) | FRED | St. Louis Fed
If we hit these rates – it’s like boom you just walked into a wall.