Bond Market Impact
One thing we think could be very impactful this year is the bond market. If you look over the last 40 to 50 years, interest rates have mostly come down from the late 1980’s to present day. Every year it has essentially been cheaper for the U.S. to refinance and increase its debt. It’s not the amount of debt that’s important, it’s how costly it is to pay that interest.
Interest Rates
For the first time, in a long time, it appears as though interest rates can’t go down further. A lot of times what causes interest rates to rise is economic growth, which is a positive. One negative item is that over half of the U.S. debt will need to be refinanced in the next 3 years. We have a Congress that’s getting elected at the end of this year that will have to deal with refinancing nearly 10 trillion dollars in debt, which is no small feat. It will become even more difficult if we have higher interest rates. At a certain point that give and take of increasing economic growth with increasing interest rates could potentially have a negative impact on the economy. It’s not just the higher rates, it’s the speed in which those rates go up, along with the speed of how our government is allowed to refinance that debt at the current lower rates.
Long Term Bonds
What will be interesting to watch is if this administration starts discussing longer term bonds. The U.S. currently has a maximum bond of 30 years while some other countries have bonds of 50 to 100 years. Does the U.S. realize that we are currently in low rates and that it could be a good thing to finance our debt by locking in these long, low rates? This could prove to be very interesting and impactful to the bond market and something we will continue to watch.
Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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