Earlier this month, Mint Capital strategist Bill Blain warned that the bond bubble is about to burst.
A crash in the bond market would likely take stocks down with it, but there is another impact that is less obvious. It could have a huge impact on the United States’ ability to finance its massive debt.
As Dan Kurz of DK Analytics points out, the federal government would have a difficult time even paying the interest on the debt in a ‘normalized’ interest rate environment.
Neither US federal debt, nor virtually any OECD government debt, could be easily carried with ‘normalized’ interest rates, which would readily be 2 to 5 percentage points higher than current short-term (ZIRP-dominated) and long-term (based on 10-year OECD government bonds with no or very nominal yields) rates. For the US government, whose cost of funds is currently around 1.4% thanks to both massively lower, QE-enabled long-term rates and to a propensity to fund deficits and refinance debt with more shorter-term funding – which has been extremely cheap thanks to ZIRP or near ZIRP for nearly nine years – every one percentage point higher average cost of funding $20.5 trillion in debt would equate to a $205 billion higher annual interest expense.’
This post was published at Schiffgold on NOVEMBER 29, 2017.