Curious Trends in the National Debt

As another year comes to an end, it’s time for the annual treasure troves of annual statistics. Here’s one: “Treasury 10-year note yields were poised for the lowest annual average since at least World War II.” The interest rates on treasury bonds have continued falling despite the enormous rise in the national debt.

us-national-debt-2012The national debt has tripled since 2000, but the amount of interest paid per year has definitely not. These things are hard to measure, depending on how you count that Social Security IOU thing and “net interest” and other factors that make my head hurt, but by pretty much any metric, the amount of interest paid per year has barely budged. Here’s some data straight from the Treasury website:


Essentially, interest rates have dropped to one-third of what they used to be, effectively canceling out the tripling of the national debt. I find this very fascinating. Even if the United States had a balanced budget, it would still require a constant demand for its debts to turn them over every year without raising rates (a.k.a. “lowering their prices”).

But the US hasn’t just been turning over its old debts, it’s been shoveling hundreds of billions of new debt into the pile every year… Econ 101 says they would need to triple the demand for their debt to keep a tripled supply at the same price.

But they haven’t just tripled the supply and managed to keep prices the same… they’ve been able to drop interest rates to one-third of what they used to be at the same time… Does that imply yet another tripling of that tripled demand?

Maybe not if you look at discount prices or whatever they’re called instead of rates. It’s all rather complicated, after all, and I only understand enough to ask dangerous questions.

We can debate all day about why this demand seems so strong, and what’s likely to happen in the future. Did the Fed really buy 77% of last year’s debt increase? Are they manipulating this whole thing? Even if they are, demand seems strong from everybody else. Will demand for Treasuries drop if the economy recovers or if Europe recovers, or will that be offset by aging demographics seeking low-risk investments? Could the national debt could triple again without affecting interest payments if rates dropped to another one-third… or 10-year yields of like 0.6%!? Seems pretty unlikely to me, and everybody expects them to go the other way, but who really knows. It’s all rather interesting, though…