Teachings From a Maturing 1990 Treasury Bond

Friday, $10 billion worth of 30-Year US Treasury bonds originally sold at auction on May 15, 1990 will mature. Partly to refinance this, the government sold new 30-year bonds on Wednesday—$22 billion worth. The results of this swap highlight a key point about US debt: While the amount of debt outstanding is up a lot, so is debt affordability.

Let there be no doubt: US federal government debt has grown dramatically these last 30 years—and seems set to rise substantially this year, too, given the fiscal response to coronavirus lockdowns. On May 12, the Treasury put overall (gross) federal government debt at $25,188,757,825,113.86.^[i] Call it $25.2 trillion for simplicity’s sake. Of that, the government itself (not including the Fed) owns $5.9 trillion. As this is both a federal government asset and liability, it effectively cancels. Hence, most economists and analysts look at net public debt, which removes intragovernmental holdings. It stands at $19.3 trillion presently.

When the government issued the 1990 bonds that mature Friday, America had about $2.4 trillion in net public debt.^[ii] Looking at this metric, to say that the aggregate amount of federal government debt has grown some is an understatement.

However, a look at our maturing bonds and their replacements paints a much richer picture. You see, the $10 billion in bonds that mature Friday carried an 8.875% interest rate.^[iii] Over this bond’s 30-year lifespan, Uncle Sam paid bondholders $2,662.50 per bond (based on their $1,000 face value).

The $22 billion in bonds the government sold this week to replace those 1990 bonds carry a 1.25% coupon.^[iv] Over these bonds’ 30-year lifespan, the government will pay holders a mere $375 per bond. (Most US federal debt is fixed rate, so rates’ fluctuations in the next 30 years won’t change this arithmetic.) This is a reduction of 86% in total interest costs per bond to the feds. Hence, even if you factor in the more than doubling of the amount offered to the public, the government will pay about one-third the interest to service this particular tranche of US debt.

Now, of course, the reduction in interest costs doesn’t mean we are paying less in total interest across the entire federal debt load today. The compound growth of federal debt would be very difficult to offset in this manner. But when you consider the government paid $375 billion in interest in fiscal 2019—an effective 1.65% interest rate on the $22.7 trillion in debt outstanding at the time—it is fairly easy to see the government can support far more debt than it could back in 1990, when it effectively paid 5.75%.^[v] Moreover, that says nothing at all about the economy’s vast growth in those 30 years, building a bigger and broader tax base.

In our view, worries over US government debt tend to center too much on raw amounts or comparisons to GDP, which really don’t give you a sense of affordability. We think digging deeper, and getting into interest costs, affords you a better view. This week’s refinancing is just a small example of that at work.