You Can’t Fix Stupid (Politicians)

The securities in question are issued by the U.S. Treasury and form part of the benchmark 10-year Treasury note market, a cornerstone of global fixed income pricing. Ten-year yields serve as a reference rate for mortgages, corporate bonds, and a wide range of financial instruments. As such, movements in issuance size and yield levels carry implications beyond the government’s own financing costs.  In other words, 10-year notes effect every American taxpayer in the wallet.

A decade ago, when the maturing 1.73% notes were sold, the interest rate environment was dramatically different. In the years following the global financial crisis, the Federal Reserve maintained exceptionally accommodative monetary policy.

You see, policy rates were near zero, and large-scale asset purchases kept longer-term yields compressed. Borrowing at 1.73% for ten years reflected subdued inflation expectations and strong demand for safe assets.

Today’s 4.18% yield reflects a normalization - and in some respects, tightening - of financial conditions. After a surge in inflation in 2021–2022 caused by an irresponsible $2.64 Trillion in new Democrat spending and signed into law by Joe Biden, the Federal Reserve was forced to raise short-term interest rates aggressively to restore price stability.

While inflation has moderated since then, yields remain well above their pre-pandemic lows. As a result, refinancing maturing debt now comes at more than double the prior interest cost.

The arithmetic is straightforward but consequential. Of the $25 billion being refinanced, the annual interest expense jumps significantly. At 1.73%, annual interest payments were roughly $432 million. At 4.18%, the same principal would cost about $1.045 billion per year - an increase of over $600 million annually.

Over ten years, that difference compounds into billions of dollars in additional interest expenses, assuming rates remain constant.  But let’s be honest, only government economists believe interest rates will remain near current levels, while some think interest rates will actually fall long-term.

But wait, the stupidity gets worse…

The Treasury is not merely rolling over old debt. By issuing $54 billion against $25 billion in maturities, the Government actually increased net debt by $29 billion. That expansion reflects the federal government’s ongoing budget deficits, which require incremental borrowing beyond refinancing.

Rising debt issuance has been a persistent feature of recent fiscal years, driven by structural deficits, entitlement spending, and higher interest costs themselves.  In layman’s terms, the government continues to throw good money after bad to maintain the status quo.

From a market perspective, the larger auction size can influence demand dynamics. Strong demand - often measured by bid-to-cover ratios and indirect bidder participation - signals confidence among domestic and foreign investors. Weak demand could push yields higher, increasing borrowing costs further. The 10-year note’s central role in financial markets means that shifts in its yield reverberate through mortgage rates, corporate borrowing, and equity valuations.

At a macro level, this issuance underscores the interaction between fiscal policy and interest rates. Higher rates increase debt service costs, which in turn contribute to larger deficits, necessitating more borrowing. While the U.S. benefits from issuing debt in its own currency and from the dollar’s global reserve status, sustained increases in both rates and issuance test investor appetite over time.

Ultimately, the $54 billion auction at 4.18% encapsulates a new era of federal finance: borrowing is more expensive, debt levels are rising, and the cost of servicing that debt is becoming a more prominent component of the federal budget.

Critics view the behavior of the United States Congress (and the Keynesians Kooks who enable the political class) as not just irresponsible but profoundly reckless. Despite trillions in existing federal debt, lawmakers routinely approve bloated spending packages, short-term stopgaps, and politically motivated add-ons with little regard for long-term consequences.

Contrary to the Keynesian methodology, deficits persist even in strong economic periods, signaling a structural failure to impose discipline when it would be easiest to do so.

Meanwhile, rising interest costs compound the damage, effectively forcing taxpayers to finance yesterday’s excesses at ever-higher rates. To detractors, this pattern reflects chronic mismanagement, political negligence, and a willful disregard for future generations who will bear the burden.  Politics really is the playground of the stupid.

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