Rates Are Up. We’re Just Starting to Feel the Heat.
Covid-19 pandemic, governments, businesses and households became addicted to low interest rates, gorging on debt to fund everything from expensive new cars to crisis-fighting stimulus and leveraged buyouts. That era was a product of the sluggish, low-inflation environment that prevailed after the 2007-09 global financial crisis, and now it is over. As investors have come to that realization in recent weeks, long-term bond yields have risen to 15-year highs.
The Federal Reserve’s federal-funds rate averaged 0.5% from 2009 through 2021. Today it is between 5.25% and 5.5% and markets think it will be around 3.5% for the next decade. As yet, this has caused little distress.
Growth is chugging along, and even the interest-sensitive housing sector seems to have a second wind. The effects will come; just wait. In the first year of the pandemic, many borrowers locked in low-cost funding for many years, effectively delaying any day of reckoning.
As that debt matures, higher interest costs will start to bite, unless rates unexpectedly fall back to their old lows. Among the most exposed: taxpayers. Federal debt held by the public rocketed from 35% of gross domestic product at the end of 2007 to 93% in the first quarter of this year as Uncle Sam borrowed first to bail out banks, then to prop up growth, then to cut taxes, then cushion the economy from the pandemic, and now to support manufacturing.
The burden of that debt has been relatively low because the Treasury could borrow so cheaply. But 67% of the debt matures within five years, according to TD Securities. TD estimates the U.S.
pays an average rate of 3.4% on that debt, well below current interest rates. In the private sector, banks were the first casualty. Three regional
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