Stimulus may raise your rates
Will anyone buy all the debt the government is issuing to pay for its bailout programs? If not, interests rates on a whole host of things could jump.
NEW YORK (CNNMoney.com) -- To pay for the massive stimulus plan, bank bailout and other spending, the government is taking on a record amount of debt, issued in the form of government bonds. If no one buys this debt, it could push up interest rates and increase how much you pay for loans on homes, cars and credit cards.
Currently, the government is having little trouble finding buyers for its debt as other assets like real estate, stocks and corporate or foreign government bonds look like a riskier bets.
But if the economy improves, as many expect it to in the latter part of the year, the fear is investors will no longer want debt from the U.S. government.
Burdened by high spending and lower tax receipts, some may view investing in the U.S. government as bigger risk.
"We've never, ever tried to sell this much debt before," said Rudy Penner, a senior fellow with the Urban Institute and a former director of the Congressional Budget Office. "I hope there's someone willing to buy it."
It's not that the United States has so much debt now. External government debt - which doesn't include money the government borrows from itself from programs like Social Security - currently stands at around 40% of the nation's gross domestic product.
That's not too bad, relatively speaking. Some European countries have debt ratios of 100% of GDP, and Japan's is nearly 200%.
But thanks to all the new borrowing, the United States' external debt is projected to rise to over 60% of GDP in just two years, according to Moody's, a credit ratings agency.
It's such a big jump, in such a short time, that got people so nervous.
"That's a gargantuan increase," said Penner, "We're obliterating records."
If there aren't enough investors to buy the bonds - investors from pension funds, insurance companies, mutual funds, foreign governments, or anyone else who buys fixed-income securities - then the price of those bonds will fall and the yields rise.
Bond yields, especially yields on the 10-year note, are the main factor in determining interest rates for homes, cars and credit cards, among other things.
"There is a concern in the market that the government won't be able to sell the debt at reasonable rates," said Sean Egan, manager of the credit-rating desk at Egan-Jones Rating Co. "Ultimately, it would mean rising rates, a lower standard of living, the whole thing."
It's hard to say how high interest-rates might rise. Yields on the 10-year note are currently below 3%, which is quite low.
But some experts have said they could conceivably double. That could send mortgage rates on a 30-year fixed home loan from just over 5% now to over 8%.
Other experts say there's little chance of that happening.
First off, they see little reason for investor interest in U.S. bonds to dry up anytime soon, since many economies around the world are reeling just as badly, if not worse, than America's.
"Supply only matters in a bear market" for bonds, said Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co., an institutional brokerage. "And this is not a bear market."
Second, if yields do rise, it would likely mean one thing: Investors are flocking to other assets because the world economy is getting better. That ultimately may be worth any increase in interest rates.
And if inflation remains in check - as it has during over the last few months and looks likely to for the foreseeable future judging from the sell off in commodities prices - that will leave the Federal Reserve free to keep its interest rate low.