Chart of the Month | Low Rates Make Record Government Debt Manageable – For Now

October 5, 2020 |
1 minute read
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Few people would have predicted that U.S. equity markets would be higher today than at the start of 2020 if told that a virus would infect over 7.0 million people in the U.S., cause over 200,000 deaths and bring the economy to a virtual standstill. In order to support the struggling economy, Congress and the President enacted massive spending increases, driving the already large federal debt to its highest level since World War II. The Congressional Budget Office (CBO) projects that in 2020 the budget deficit will reach 16 percent of GDP, almost doubling the peak after the Great Recession in 2009 and the highest level since 1945. As a result, investors are concerned about the ability of the U.S. government to fight future crises and economic downturns as well as support critical government programs. For now, the debt is not a problem as governments continue to borrow at record low rates while corporate needs are being met by private lending as institutions continue their quest for yield. It is difficult to estimate at what level the debt begins to negatively impact an economy but record low interest rates should help governments to sustain these record debt loads for some time. As shown on the chart, as 10-year Treasury yields dip below 1.0 percent, interest payments on government debt are also expected to decline by around 10 percent in 2020. Projections from the CBO show that over the next 10 years, servicing the national debt as a percent of the size of the U.S. economy will be cheaper than at any time during the last 50 years. Even after a few Treasury auctions that saw a slight drop in demand, the government can now borrow for 30 years at 1.5 percent, the lowest interest level on record, (excluding the brief market dislocation in March 2020). However, servicing an ever-increasing debt load is unsustainable as it won’t always be this cheap. The CBO predicts that net spending on interest as a percent of GDP will quadruple from 2025 to 2050, while spending on major healthcare programs and Social Security also increases – a potential disaster scenario.

Chart of the Month | Net Interest as Percent GDP and Budget Deficit

 

Ivo C. Nenin

Author

Ivo C. Nenin

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.