So, interbank interest rates are no longer next to zero....

[Punxsutawney]

....and the world has not ended so far.

http://www.cbsnews.com/news/fed-hikes-interest-rates-for-first-time-in-a-decade/

From a financial standpoint, this is an historic moment for the country and the world, especially in the context of what has been going on since the Fed set rates at those levels seven years ago.

We'll have to wait and see what the repercussions are, as they continue to elevate borrowing costs over the next couple years, but they have made the first step without the markets collapsing.

 

[Vader]

My issue isn't the market. They've had free money for too long. My issue is the national debt (not to be confused by 21 as the yearly deficit). It won't be long before payment on the debt will be huge part of the budget.

 

[IndySteel]

I don't think they should have done it. Unemployment is at a record high, the steel and oil & gas industries are in the *******. You don't kick people when they're down. Unless they're terrorists.

 

[Punxsutawney]

My issue isn't the market. They've had free money for too long. My issue is the national debt (not to be confused by 21 as the yearly deficit). It won't be long before payment on the debt will be huge part of the budget.

We've paid much higher interest on the deficit a decade ago.

I do not think that's much of a concern, given the problems Europe and Asia have. An excessively strong dollar that destroys exports and collapses consumer prices is the biggest concern, IMO.

It becomes amplified if China attempts to adjust their currency peg to the dollar again, as they tried to do in August, and largely reversed when they saw the world's reaction.

 

[ark steel]

Way behind when it should have been done. Fed needs to loosen up and let the free market work. Trouble is, no one wants to be responsible for the short term pain to meet long term goals.

I don't mind the idea of the Fed using monetary policy on a short term basis, but it went on too long in the 90's, the 2000' and into the current decade.

 

[Vader]

We've paid much higher interest on the deficit a decade ago.

I do not think that's much of a concern, given the problems Europe and Asia have. An excessively strong dollar that destroys exports and collapses consumer prices is the biggest concern, IMO.

It becomes amplified if China attempts to adjust their currency peg to the dollar again, as they tried to do in August, and largely reversed when they saw the world's reaction.

A decade ago the debt was less than half of what it is now. Remember Obama has accumulated more debt than every president before him combined. This article was written last year but the projections are spot on:

http://www.thefiscaltimes.com/Articles/2014/01/08/Rising-interest-rates-will-slam-Federal-Budget

That rising interest rates are practically inevitable means the price of servicing the federal debt is about to jump. A study last fall by the bipartisan Committee for a Responsible Federal Budget noted that total interest payments on the federal debt in 2013 were approximately $255 billion. To put that in perspective, the sequester that was the focus of such debate in 2013 and ultimately led to a government shutdown only cost $85.3 billion in its first year.
According to the CFRB, if interest rates rise as most estimates expect (3-month Treasuries to approximately 4 percent by 2018 and 10-year Treasuries to approximately 5.2 percent) interest payments on the Federal debt will soar to $505 billion in 2018.

 

[Punxsutawney]

I could be wrong here, Vader, but the debt already issued by the US government is set at a fixed rate.

The increase in rates only impacts the money the government borrows going forward.

 

[Troglodyte]

Trouble is, no one wants to be responsible for the short term pain to meet long term goals.

The same can be said for cutting spending and raising taxes.

 

[Troglodyte]

The increase in rates only impacts the money the government borrows going forward.

Thank God there's a limit to how much they can borrow... oh, wait.

 

[Rod Farva]

The same can be said for cutting spending and raising taxes.

What in your experience makes you think any tax hike would be short term? That's long term pain that never seems to meet any goal.

 

[IndySteel]

The increase in rates only impacts the money the government borrows going forward.

It hits anyone with a mortgage, auto loan or credit card.

 

[ark steel]

The same can be said for cutting spending and raising taxes.

As Ron states, I don't recall any short-term taxes at the federal level.

 

[21STEELERS21]

When treasury bonds expire they get resold at the higher rate, so eventually all the debt moves to higher rates.

 

[Troglodyte]

What in your experience makes you think any tax hike would be short term? That's long term pain that never seems to meet any goal.

Yes, but then how much of our spending is short term?

 

[Roy92040]

My issue is my money in the bank has not been making money.

 

[Vader]

I could be wrong here, Vader, but the debt already issued by the US government is set at a fixed rate.

The increase in rates only impacts the money the government borrows going forward.

The debt is bought by people, companies, other government and even other branches of the government. It is issued on short term treasuries. Those come due at certain dates and will increase the payments of interest by the feds.

 

[Punxsutawney]

The debt is bought by people, companies, other government and even other branches of the government. It is issued on short term treasuries. Those come due at certain dates and will increase the payments of interest by the feds.

The rates on debt securities already sold and being traded, whether they're on the short or long end cannot be changed, right?

Rates are definitely going up, but it's been my understanding that it impacts the deficit directly and the total debt indirectly, as each annual deficit is added to the debt.

Most of the debt accumulated during the Obama Presidency has been issued at historically low rates. The next President isn't going to have that luxury.

 

[ark steel]

The rates on debt securities already sold and being traded, whether they're on the short or long end cannot be changed, right?

Rates are definitely going up, but it's been my understanding that it impacts the deficit directly and the total debt indirectly, as each annual deficit is added to the debt.

Most of the debt accumulated during the Obama Presidency has been issued at historically low rates. The next President isn't going to have that luxury.

Depends upon the terms of the bonds. In general, the rates don't change for the length of the bond, but I wouldn't think most are more than 10 years or so, and, I'd bet a lot of them are shorter term. It'd be interesting to know what bonds are being sold to other countries. If they are 1-2-year bonds, the debt servicing payments could go up fast!

I'm not sure if US bonds are sold on a callable basis or not. I don't recall seeing any listed as callable like Corporate bonds would be.

 

[Punxsutawney]

Depends upon the terms of the bonds. In general, the rates don't change for the length of the bond, but I wouldn't think most are more than 10 years or so, and, I'd bet a lot of them are shorter term. It'd be interesting to know what bonds are being sold to other countries. If they are 1-2-year bonds, the debt servicing payments could go up fast!

I'm not sure if US bonds are sold on a callable basis or not. I don't recall seeing any listed as callable like Corporate bonds would be.

That is kind of the question I have. I do not think the yield on already existing Treasury debt is subject to changes in market rates.

We're getting into rather complex finance here, and I won't pretend to fully understand it.

 

[Spike]

Fed Rate Goes Up. Mortgage Rates Go Down

Mortgage rates moved just slightly lower today, despite the long-awaited Fed rate hike. Once again, that's LOWER mortgage rates and a HIGHER Fed rate. Here's how that works:

http://www.mortgagenewsdaily.com/consumer_rates/543379.aspx

 

[Coach]

My issue is my money in the bank has not been making money.

Nor will it anytime soon. I used to get 4% interest in my money market account.

The fed needed to raise rates a small amount. For the move.

 

[ark steel]

That is kind of the question I have. I do not think the yield on already existing Treasury debt is subject to changes in market rates.

We're getting into rather complex finance here, and I won't pretend to fully understand it.

It gets complex fast!

Someone can correct the below if I messed up something, but it is meant to be very basic and general:

In general, you are right, debt payments (the amount of monthly/annual interest payments to bond holders) does not change for existing debt. I would think a bond could include changes in the debt payment, but I'd also think that uncommon for Treasuries.

What does change is what you could sell that bond to someone else for. So, if I have a 5-year bond I just bought and it pays a low rate, and new 5-year bonds are paying higher rates, I'm unlikely to be able to sell my bond for what I could a few months ago and will have to deal with the monthly interest payments. This won't have any effect on my income, but my portfolio would show a drop in the bond's "market value". The bond still pays the same amount each month and is still worth the same amount at the end of the 5 years. Just the value that I can sell it for went down.

If we have a lot of 30-year treasuries outstanding with these low rates, that is good, but I don't think they even issue 30-year treasuries anymore. Nor do I think anyone would buy them with currently low rates.

 

[Confluence]

It gets complex fast!

Someone can correct the below if I messed up something, but it is meant to be very basic and general:

In general, you are right, debt payments (the amount of monthly/annual interest payments to bond holders) does not change for existing debt. I would think a bond could include changes in the debt payment, but I'd also think that uncommon for Treasuries.

What does change is what you could sell that bond to someone else for. So, if I have a 5-year bond I just bought and it pays a low rate, and new 5-year bonds are paying higher rates, I'm unlikely to be able to sell my bond for what I could a few months ago and will have to deal with the monthly interest payments. This won't have any effect on my income, but my portfolio would show a drop in the bond's "market value". The bond still pays the same amount each month and is still worth the same amount at the end of the 5 years. Just the value that I can sell it for went down.

If we have a lot of 30-year treasuries outstanding with these low rates, that is good, but I don't think they even issue 30-year treasuries anymore. Nor do I think anyone would buy them with currently low rates.

good stuff Ark.

the part that matters most is the average maturity of the outstanding debt. As rates rise, it is probably better to have more debt coming due later, rather than in next short while, but that depends on the rate rise cycle. My guess is that they are raising rates so that they can cut them next time they need to. Here is a chart that shows this. Note that in the 2008/9 panic, the market only wanted, and the government complied with much shorter term securities.

So that sounds like things are good, huh?

Not so fast. This chart indicates the real issue, the amount of present day dollars necessary to service the existing debt. As long as the annual deficit goes up, and the interest rate is flat or higher, this number becomes higher. If GDP growth is not good, then the debt service takes on more of the national output and you become Greece. Except that no one exists to bail out the US of A.



Here is a fun chart:



It sure looks like you all have been in another World War for a bit, and that it is gonna continue.

 

[Vader]

That is kind of the question I have. I do not think the yield on already existing Treasury debt is subject to changes in market rates.

We're getting into rather complex finance here, and I won't pretend to fully understand it.

I understand this is very complicated but remember everything from T-bill, which mature in 1 year or less or T-notes, which mature in 2-10 years are quoted on the secondary market at percentage of par in thirty-seconds of a point and have "coupon payments". Here is a good article from a couple of years ago. It has a section on higher interest rates and what it does to the national debt.

http://www.heritage.org/research/re...bt-will-weaken-the-economy-and-hurt-americans

The Congressional Budget Office predicts that interest costs on the debt will more than double before the end of the decade, rising from 1.4 percent of GDP in 2013 to 2.9 percent as early as 2020.

I've seen several articles and read several economist on the issue. They all say pretty much the same thing. If interest rates go up the amount of interest payments from the U.S. will explode.

 

[Ironcitysteelers]

The only reason I put money in the bank is to keep it from the wife. I know it won't make me money, but rather try and keep it safe.