Goldman Expects an Interest Rate Surge

Goldman Sachs Sees U.S. Interest-Cost Surge on Yield, Deficit Rise

There has been a historic expansion in U.S. borrowing during a period of economic growth.  In addition, we have seen rising bond yields.  Together this will cause a surge in the cost of servicing American debt.  This according to Goldman Sachs Group Inc.

“Federal fiscal policy is entering uncharted territory.” “In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred.”

The average maturity of U.S. debt is almost six years.  As a result, rising yields will take some time before they send the interest rate the Treasury pays to borrow above the growth rate of gross domestic product.  However, when that does happen, it will send the ratio of debt to GDP, which is already elevated, climbing further from about 77 percent now.

What’s more, debt-to-GDP will probably be higher than 100 percent.  This will put the U.S. in a worse fiscal position than the experience of the 1940s or 1990s.”

Goldman market strategists see 10-year U.S. Treasury yields peaking in the region of 3.5 percent to 3.75 percent.  This is about a percentage point higher than the average over the past decade.  Furthermore, they boosted their year-end forecast to 3.25 percent last week.

Looking for historical parallels among advanced economies, Goldman pointed out expansionary fiscal policies during economic growth periods in Belgium in the 1970s, Italy in the 1980s and Japan in the 1990s. In the cases of Belgium and Italy, debt ratios continued to deteriorate years later even after budgets were tightened.  This was a result of higher interest costs.

Read more.

Related

JOIN THE DISCUSSION