Bond yields signal limited alarm over rising U.S. debt costs

The U.S. debt load has climbed to about $39 trillion, yet the bond market is not flashing the kind of alarm that would suggest an immediate funding crisis. Fortune reported that long-term Treasury yields have remained contained even after the Federal Reserve signaled a tougher stance on inflation.

At its June 17 meeting, the Fed kept rates at 3.5% to 3.75%, Fortune reported. The central bank also indicated that a rate increase could come later this year, a shift from earlier expectations that cuts were more likely.

Kevin Warsh, in his first meeting as Fed chair, emphasized the Fed’s price-stability goal, according to Fortune. Traders initially moved toward bets on higher rates, and stocks fell about 0.5% to 1% that day amid concern that pricier borrowing could pressure debt-heavy investment in artificial intelligence, Fortune reported.

The more telling move came in Treasuries. Fortune reported that short-term yields rose, while the 10-year Treasury yield, a key benchmark for government borrowing costs, changed little and later declined.

Why Fed hikes may not quickly hit the debt bill

The federal government now spends more than $1 trillion a year on interest, Fortune reported. That is more than it spends on the military or health care, according to Fortune.

Eric Winograd, chief U.S. economist at AllianceBernstein and a former New York Fed staffer, told Fortune that a Fed move affects mainly the short end of the Treasury market. A modest rise in short-term rates for a year would not have a major effect on the overall cost of servicing the debt, Winograd said.

Fortune reported that the government’s debt is not one loan with one rate. The Treasury continually issues new debt to replace maturing obligations, and the cost depends on market rates at the time of issuance.

Winograd told Fortune that the more important rates are those attached to longer maturities, such as 10-year and 30-year debt. Those rates have recently been eased by lower oil prices and cooler inflation, Fortune reported.

Demand at Treasury auctions has also held up, according to Fortune. Winograd told Fortune that talk of investors abandoning Treasuries for gold has produced more discussion than action.

Economists point to longer-term strains

Fortune reported that economists still see warning signs beneath the calmer market reaction. David Doyle, head of economics at Macquarie, said in a note cited by Fortune that investors have been demanding a higher long-term lending premium from the U.S. government, reaching its highest level in more than a decade.

The deficit is another concern. Fortune reported that the federal government is borrowing about 6% of gross domestic product even with low unemployment and a healthy economy, a pattern the report described as unusual outside recessions.

Macquarie also warned that official projections may understate future interest costs, according to Fortune. The government’s average interest rate is about 3.35%, while budget forecasts assume it rises only to 3.9%; if it instead reaches 5% or 6%, Macquarie said the deficit could exceed 10% of the economy.

Erik Norland, chief economist at CME Group, argued in a note cited by Fortune that policy choices may be helping suppress long-term yields. Fortune reported that the Treasury has leaned more on short-term borrowing while issuing less long-term debt, and the Fed has slowed sales of its own bond holdings.

Norland pointed to Japan, the U.K. and France as examples where similar fiscal pressures have coincided with rising long-term rates, according to Fortune. Winograd told Fortune there is no fixed debt level that automatically triggers unsustainability; the debt can be maintained as long as lenders keep financing it.

If that support changes, Winograd told Fortune, the turn would likely come through political decisions by large foreign lenders, especially Asian central banks, rather than through a purely economic threshold.

This story draws on original reporting from Fortune.