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April 15, 1994
Interest rates achieved a sort of stability this week, but are still more likely to rise again than improve.
Despite good inflation news, and weak retail sales, every time 30-year bond yields got down to 7.20%, rates rebounded upward. In mortgage terms, that yield corresponds to about 8.50% at zero and zero. Whenever rates get down to that level, non-gamblers should lock at once.
The 15th of April is a perfect day on which to think about the money our government has spent in excess of the money we have paid in taxes.
Roughly, $4,600,000,000,000.
Many people are hazy about how the government borrows this much money. This uncertainty is reasonable, as most of us can't figure out how our Visa balance got so high last month.
The government has two borrowing needs. The first gets all the press, but the president recently changed the second one, and his maneuver is about to get unpleasant attention.
The first sort of borrowing is to raise new cash each year to fill the hole between taxes paid and money spent. This year we will enjoy the great victory of borrowing only $160,000,000,000.
This cash is raised by selling U.S. Treasury IOUs. Investors give the Treasury cash in exchange for a promise to be paid back someday, and some interest.
"Someday" varies from promises to pay back in thirty years (those infamous "bonds") to ten years, seven years, five, and so on all the way down to one day "cash management" bills.
The complicated part of government borrowing is the second part: the term here is "rollover."
No matter what the current year deficit, every day old IOUs from 1967, 1979, 1981, 1990 and maybe yesterday come due and have to be paid back.
As you may have guessed, if we have to borrow to cover current spending, we have to borrow to pay off old IOUs.
One, small piece of the rollover operation happens every Monday when the Treasury sells $25,000,000,000 worth of short term IOUs ("bills"), about half due in 90 days, and the other half due in six months.
A year ago, Mr. Clinton decided that short term rates were so low that the Treasury should sell more T-bills instead of those nasty, costly bonds. Six months ago, the Treasury could have been locking in the cost of ten-year debt at 5.50%. Instead, it borrowed more and more at short term, then only costing 3.00%.
Now, all of last year's T-bills have to be rolled into new T-bills costing nearly 4.00%. The one percent change will add about $20 billion to rollover costs this year. Every time the Fed tightens a percent, another $20 billion.
Real slick management, there.
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