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Treasury Announcement
Federal Borrowing to Hit Decade High
Talk to Me in a Couple of Months
January, 2006

On January 9, the U. S. Treasury Department announced its borrowing plans for the next month—about $100 billion. This planned sale of bonds and other securities is the largest since 1996. Remember that the way the government borrows is to issue new securities, so this huge issuance of bonds and notes is the result of our higher federal deficits.

There is a major difference in the situation now, as compared with 1996. A decade ago, interest rates were falling, and the new securities we issued were replacing debt instruments with much higher rates. Today, it is the opposite. Rates are rising, and at least some of this new debt will replace recent short term debt that was incurred at lower interest.

Treasury securities are sold in an auction market. In essence, they go to the highest bidder. If there are a lot of buyers, with a lot of money to allocate—or if there are relatively few securities available, prices are high. If money is tight, or if there are lots of bonds being sold, prices are lower. When investors pay high prices for securities, they earn less on them, meaning the interest rate is effectively lower. Conversely, lower prices mean higher interest rates.

Corporate Borrowing Also Rising.
The significance of the government's increased borrowing is exacerbated by another piece of news—corporate borrowing is expected to reach record levels during the next quarter. Corporations borrow the same way the government does, by issuing bonds. And they sell those bonds in the same worldwide marketplace as the government. So, it is the aggregate of corporate and government borrowing that determines bond prices.

I can't tell you when our government's irresponsible borrowing will tip the scale of the international financial markets and trigger a spiral of higher interest rates—no one can tell you that. But we may get a clue during the next six to eight weeks. Watch the prices of both Treasury securities and corporate bonds. If bond prices fall, meaning that their yields are rising, it may signal that investors don't have the stomach to keep buying bonds without the promise of higher returns. If on the other hand, prices hold up, it will tell us that the money supply is still great enough to support significant bond investing at the current low rates.

If you're not clear why this is so important, read The Muser's article on national debt interest, or the discussion in the FAQ: here, and here.