Question

The United States has almost $25 Trillion in debt of which $20 Trillion trades daily as government bills, bonds, and notes – obligations which in theory have to be retired when they mature. Lately the interest rates have been below 2% reflecting an economy struggling to grow. What impact will that have on the ability to retire the debt?

Answer 1

Interest rate falls when economy is showing the down turn. When interest rate falls, the bond prices will rise, the investor return is higher in lower coupon bonds. Lower coupon bonds experience a good appreciation when the interest rate falls. Falling of the interest rates will impact greatly on the retirement of debt as bond price will appreciate. Falling interest rate will have a high yield as it will be more attractive to investors. But, on the other hand, falling interest rate to a greater extent say below 2% reflects the down turn of economy. It will be difficult to retire the debt as the amount that must be used for retiring the debt can be used for more useful purpose like for more production for the growth of the economy. If the debt gets retired than firms or government will have little funds left in there hand for production of goods and services which will result in the more down turn of the economy.