We may have an economic crisis, but it comes with an opportunity in low borrowing rates
Romeo Ranoco / Reuters / File
Like many others, I have made the point that the low borrowing costs are something we should take advantage of right now. As Ezra Klein put it the other day, we’ve got an economic crisis, but it’s a crisis that creates an opportunity: the protracted downturn, along with the aggressive monetary policy in response, have pushed down interest rates so the US gov’t can cheaply borrow to do something—as in jobs programs–about that slow growth.
I still think that’s true. In fact, it’s one of the most important economic policy insights of the moment. But there’s an important caveat that some of my deep-in-the-weeds-budget-expert friends at CBPP have impressed upon me. The dynamics of how Treasury both borrows and pays off the public debt make this still-good deal not quite as good as it sounds.
First of all, the Treasury doesn’t try to time the bond market, strategically mixing up the maturities in its portfolio to get the best deal of the moment. As the figure shows, the average of outstanding debt has been around five years since the 1990s (the dips in 2008 and 2009 were anomalous—the Treasury sold more short-term debt than usual as part of the Fed’s temporary liquidity initiatives).
So while the yield on 30-year Treasuries is slightly above 3% now compared to 5% a couple of years ago, such bonds make up about the same share of the Treasury’s portfolio now as they did then (around 5%). Yes, the real interest rate on five-year Treasuries was a remarkable -0.8% the other day, meaning once you adjust for inflation, investors will pay you to hold their money for them. But that doesn’t lead Treasury to flood that market.
Perhaps they should, but one of their goals is to protect the budget from swings in interest rates, so they keep a pretty steady composition of maturities and have, as the figure shows, lengthened the average maturity over time. To do so is one way borrowers lower their exposure to interest rate swings, and it means you sometimes pass up bargains today to shield yourself from nasty spikes tomorrow.