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- Bloomberg
America’s $20 Trillion Debt Pile Is Getting Cheaper as It Grows
(Bloomberg) -- The U.S. government is paying less as it borrows more, one reason investors appear more comfortable than Congress about funding another leg of stimulus.Interest payments in the federal budget declined about 10% in the first 11 months of this fiscal year, when America was running up its biggest deficit since World War II. Over the next few years, servicing the national debt will be cheaper than any time in the past half-century when measured against the size of the economy, according to the Congressional Budget Office.That’s because yields in the $20 trillion U.S. Treasury market plunged to record lows early in the pandemic -- and they’ve risen only slightly since then, even though the supply of debt has surged to a record.Borrowing probably won’t always be this cheap, but for now the U.S. government is far from running up against any financial limits, as it seeks to shore up the economy after a wave of shutdowns and layoffs. Concerns that the country can’t afford much more spending have been voiced by officials from both political parties in recent weeks, as stimulus efforts ground to a halt.“While there’s been a lot of concern about the mounting debt, it hasn’t caused the problems that were anticipated by the doomsters,” says Ed Yardeni, founder of Yardeni Research Inc. “It’s not just a question of how much debt is outstanding, but what is the cost to service that debt.”The CBO predicts a deficit of about $3.7 trillion this year, or 16% of GDP, more than triple the year-earlier figures. Bonds issued to fund the shortfall have pushed the U.S. public debt past $20 trillion –- more than the economy’s annual output.‘Not Stretched’Yet the average yield on the debt has dropped to 1.7%, from 2.4% in December, and it’s set to fall further.Even after a few auctions that saw signs of faltering demand, the government can borrow for 30 years at below 1.5%. And the Treasury has tilted sales toward such longer-term securities, helping lock in historically low rates. The latest long-bond auction on Thursday drew a solid bid.“The U.S.’s debt affordability is quite OK, not stretched by any means,” says Felipe Villarroel, a portfolio manager at TwentyFour Asset Management in London. “We also look at what is the perceived use of the money a government is borrowing, which is now widely accepted as necessary.”The idea that governments need financial-market approval for their budget policies has in any case been called into question.Anti-VigilanteYardeni coined the term “bond vigilantes” in the early 1980s. It described investors who were supposed to exert power over governments by selling their bonds, or merely threatening to, and thus making deficit-spending more expensive.But now the dominant presence in markets is a kind of anti-vigilante, which does the opposite of all those things: the Federal Reserve.Fed purchases have siphoned about $1.8 trillion of government debt out of the market since March, while the Treasury was issuing some $3 trillion of new bonds. The central bank is currently adding about $80 billion of Treasuries a month. It’s also promised to keep short-term rates at zero for the foreseeable future and tolerate above-target inflation, while urging the government not to ease up on fiscal stimulus.Stanley Fischer, former vice chair of the Federal Reserve, said Friday in a Bloomberg Television interview that a low interest-rate burden means the Fed can do more to bolster the economy.“It means that the Fed can keep going with very cheap money, that it can go on for a much longer time at this rate,” he said.There’s a broad consensus among bond investors that if rates on longer-term government debt start to creep up, as they’ve occasionally threatened to, then the Fed can and will step in.‘Still Out There’“If there were some bond vigilantes still out there to push the bond yields higher,” is how Yardeni puts it, “then the Fed will target the bond yields.”In an Aug. 31 speech, Fed Vice Chair Richard Clarida left the door open to a policy of capping Treasury yields at some point, though he indicated it’s not imminent.Even the potential for such a move is helping to keep the government’s borrowing costs down, investors say.The 10-year Treasury note has been trading around 0.7% for weeks, and it’s forecast to end the year within a few basis points of that level, according to Bloomberg surveys.‘Look Different’In the financial world there are plenty who argue that the low interest bills America currently pays on its growing debt are just a short-term respite –- like a teaser rate on a jumbo mortgage.“The Fed is greasing the system to make sure the financial markets are functioning well,” says Gary Pollack, head of fixed-income for private wealth management at Deutsche Bank. “But at some point in time the world will look different, and all of a sudden we are going to be stuck with a huge bill.”That view still carries some weight in Congress too, even if deficit hawks –- Washington’s version of bond vigilantes –- aren’t the force they once were.President Donald Trump’s Republican Party has used its Senate majority to push for scaled-back measures in the next pandemic bill. Democratic presidential candidate Joe Biden has promised more spending if he beats Trump in November’s election, but a senior aide told the Wall Street Journal last month that it’s not clear what America can afford because “the pantry is going to be bare.”‘Not Worth Anything’Taking the opposite view is the emerging school of Modern Monetary Theory. It argues that countries like America, which borrow in their own currency, can set the interest rates on their debt as a policy variable –- and don’t really need to sell bonds anyway. The risk is overheating the economy rather than running out of market funds.Also cited by the dovish camp is Japan, which has a national debt about two-and-a-half times bigger than America’s (by comparison with their economies). After more than two decades of low interest rates, its debt-servicing cost is approximately zero.David Levy, chairman of Jerome Levy Forecasting Center LLC, says that ultimately there are limits to government debt –- but the U.S. is nowhere near hitting them, and has room for more borrowing to pull its economy out of the coronavirus slump.“It would take a long time to get to the type of inflationary scenario where people thought the dollar was not worth anything,” he says. “You can keep this process growing without it breaking down.”(Updates with Fischer comment.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
- Bloomberg
U.S. Job Losses Persist as Claims Come In Higher Than Forecasts
(Bloomberg) -- Applications for U.S. state unemployment benefits held steady last week, a sign extensive job losses are persisting as the nation struggles to control the coronavirus.Initial jobless claims in regular state programs were unchanged at 884,000 in the week ended Sept. 5, Labor Department data showed Thursday. Due to a change in the methodology for seasonal adjustment earlier this month, the figure is directly comparable only to the prior week. Continuing claims -- the total number of Americans claiming ongoing unemployment assistance in those programs -- rose 93,000 to 13.4 million in the week ended Aug. 29.The median estimates in a Bloomberg survey of economists called for 850,000 initial claims in the latest week and 12.9 million continuing claims. Before the pandemic, initial claims were running at about 212,000 a week, with continuing claims at 1.7 million.Read more: Bloomberg’s TOPLive blog on the jobless claims dataThe unexpectedly high levels of claims underscore the uneven nature of the labor market’s recovery. Many businesses are hiring or bringing back workers, yet millions remain unemployed and others are on the chopping block as more companies announce job cuts and small-business aid runs dry.With lawmakers at a stalemate over additional jobless benefits and President Donald Trump’s stopgap aid ending, unemployed Americans face even tougher challenges than before. In addition, virus cases are climbing again in some parts of the country.“It is especially concerning that the pace of layoffs has not slowed more materially even though the economy has reopened more fully, and more and more businesses have come back online,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a note. “The risk now comes from another round of virus outbreaks in coming weeks. The labor market remains at risk of permanent damage which will prolong the path back to pre-pandemic levels.”Despite the weaker-than-forecast jobless figures, U.S. stocks rose at the open on Thursday, while 10-year Treasury yields were higher.Before seasonal adjustments, initial claims in state programs rose by about 20,000 to 857,000, led by increases in California and Texas. The rise in California could partially reflect temporary job losses due to wildfires in the state, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank AG.“It’s still historically-high jobless claims, but I don’t want to overemphasize one single data point given that there is some uncertainty about what’s driving it,” Luzzetti said.Read more:Extra Unemployment Benefits Authorized by Trump Running DryDoomed-to-Fail Senate Vote Will Usher Final Scene on StimulusAmericans Stayed Inside Even as Cities and States ReopenedPickup in U.S. Quits Rate Hints at Growing Labor-Market OptimismBloomberg Economics’s Swing State DashboardEven so, initial claims for Pandemic Unemployment Assistance, the federal program that extends unemployment benefits to those not typically eligible like the self-employed, increased for a fourth straight week. Those claims increased by almost 91,000 from the prior week to 838,916 in the week ended Sept. 5 on an unadjusted basis, the highest since late July and less than 20,000 shy of the total in regular state programs.If continuing claims fail to show further declines, that would mark a break in labor-market progress since the depths of the pandemic. Data last Friday showed U.S. employers added another 1.37 million jobs in the month, and the unemployment rate fell almost two percentage points to 8.4% -- the second largest one-month improvement in the measure on record.What Bloomberg’s Economists Say“Regular state initial benefits, including initial claims under Pandemic Unemployment Assistance (NSA), rose for a fourth consecutive week. The labor market recovery appears to be flattening well shy of the pre-pandemic peak.”\-- Eliza WingerRead more for the full reaction note.In addition, any substantial improvement in continuing claims in the coming weeks and months could fail to reflect the full picture if it involves more Americans exhausting their regular benefits and rolling onto a federal program that provides as many as 13 additional weeks of jobless benefits.Millions of Americans are also heading for long-term unemployment, or unemployment lasting 27 weeks or more. Most states offer 26 weeks of jobless benefits, but many of the workers who have been without a job since late March will hit that mark this month.Continuing claims for the federal program, known as Pandemic Emergency Unemployment Compensation, increased by about 29,000 to 1.42 million in the week ended Aug. 22.The Labor Department said the total number of Americans claiming benefits in all programs rose by about 380,000 to 29.6 million in the week ended Aug. 22, compared with about 1.6 million a year earlier. That number, however, has been inflated during the pandemic, as multiple weeks claimed by one person are counted as multiple people instead.A separate Labor Department report Thursday showed prices paid to U.S. producers rose in August by more than forecast, indicating a rebound in demand from the pandemic-related lockdowns is gradually restoring pricing power.(Adds economist’s comment on California claims)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
- Motley Fool
What the Fed's New Long-Run Inflation Outlook Means for Your Portfolio
The Federal Reserve recently updated its view on monetary policy, and the changes will have broader implications for the economy as well as your investment portfolio. Here is a quick explanation of what the Fed has changed and what that change means for investors. Historically, the Fed has used the Fed Funds rate (the rate at which banks generally lend to each other) as a way to set short-term interest rates.
