Answer: Interest rates in the US and the interest the US pays on its debts, like Treasuries, are closely connected, but it’s a bit more complex than fixed debt payment obligations.
How It Works:
- Fixed vs. New Debt:
- Existing Treasuries: Most Treasuries have fixed interest rates. When interest rates rise, the interest payments on these existing Treasuries do not change. The US continues to pay the same fixed rate agreed upon when those Treasuries were issued.
- New Treasuries: When the US issues new Treasuries to borrow more money or to refinance maturing debt, it must offer interest rates that are competitive with the current market rates. If interest rates in the market are higher, the US has to offer higher rates on these new Treasuries to attract buyers.
- Impact of Rising Interest Rates:
- When interest rates rise, the cost of issuing new debt increases. This means that as old debt matures and is refinanced, the US will have to pay higher interest on the new debt.
- Over time, this increases the overall interest burden on the national debt, as more of the debt is rolled over into new, higher-interest obligations.
- Total Interest Payments:
- The total interest the US pays on its debt is a mix of payments on existing fixed-rate Treasuries and new debt issued at higher rates. As the proportion of debt issued at higher rates increases, so does the overall cost of servicing the national debt.
Example:
- Suppose the US has $10 trillion in debt, with $2 trillion maturing each year.
- If the average interest rate on existing debt is 2%, but new interest rates are 4%, the cost to refinance that $2 trillion will be higher.
- The interest on the $2 trillion refinanced at 4% will be $80 billion per year, compared to $40 billion if it had been refinanced at the old 2% rate.
Key Takeaway:
While existing debt payments are fixed, rising interest rates affect the cost of new debt. Over time, as more debt is issued or refinanced at higher rates, the overall interest expense for the US government increases, impacting the federal budget and potentially leading to higher taxes or reduced spending in other areas.
