The U.S. government’s interest expense fell to the lowest in seven years as yields on Treasury debt dropped to records even as debt soared beyond $16 trillion for the first time, aided by a one-time accounting change.
The U.S. paid $359.8 billion in interest on $16.1 trillion of debt in the 12 months ended Sept. 30, according to the Treasury Department’s TreasuryDirect website. That’s down from $454.4 billion for the 2011 fiscal year and the least since $352.4 billion in fiscal 2005.
The fiscal 2012 interest bill was reduced by a change in Department of Defense accounting methods for market-based securities, a one-time adjustment of $75 billion for the month of July. Without the adjustment, the interest bill would have been the lowest since $414 billion in fiscal 2010.
Borrowing costs for the U.S. declined as investors sought the safety and liquidity of U.S. government securities as the European sovereign-debt crisis worsened, employment growth stalled and Federal Reserve policy makers sought to bolster the economy by extending the average maturity of the central bank’s Treasury holdings. The lower borrowing costs have helped the administration of President Barack Obama as the U.S. has run the only four budget deficits exceeding $1 trillion in the country’s history as it has struggled to recover from the worst financial crisis since the Great Depression.
“That reflects not only low interest rates, it also reflects important debt-management principles,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The Treasury has rebuilt its access across the debt spectrum” so that it can sell bonds without dislocating other borrowers.
The reduction in borrowing costs comes amid record demand for U.S. debt. The Treasury has received $3.16 in bids for each $1 of the $1.59 trillion of notes and bonds it has sold at auction this year, topping the $3.04 in bids recorded last year, the most since the government began releasing the data in 1994.
The central bank said in August 2011 it would hold its target interest rate close to zero through 2013. It revised that forecast in its Sept. 13 statement, saying “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
“The Federal Reserve keeping interest rates low should not only be beneficial to the federal government, but beneficial to everyone else,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed.
The Fed has bought U.S. government securities as part of its efforts to support the economy and hold down borrowing costs. It holds $1.64 trillion of the debt, up from $475 billion in March 2009.
For the 2001 fiscal year, the last time the U.S. budget was in surplus, money owed on the obligations was $359.5 billion.
The Treasury pays interest to the Fed on the securities held by the central bank. That interest is included in the earnings generated by the Fed through its activities, which are remitted to the government, minus expenses, by the central bank each year.
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