It’s official. The U.S. federal government shutdown has arrived. This is likely to bring an economic impact outside of the initial jobs lost and furloughed. Still, the financial markets are quite resilient as history has shown multiple times that government shutdowns are short-lived. History has also proven that shutdown are a buying opportunity from any weakness for longer-term investors and for traders alike. The U.S. Federal Reserve has just recently begun its interest rate cutting campaign, and two to three more rate cuts are expected in the coming FOMC meetings.
There is one ongoing nagging sensation in the U.S. Treasury market, and it should irritate every taxpayer whose tax payments help fund the debt just like funding education, healthcare, and defense spending — the United States is simply paying a massive interest rate premium compared to almost all developed nations!
While getting to the “finally we have rate cuts” phase has been like pulling teeth, the reality is that the Fed really has more control over short-term interest rates than it does over long-term rates. Sure, it can intervene by buying more Treasuries. But that may not be a solid “use of funds” at the present time under a continually growing deficit. The good news is that the latest cut alleviates at least some concerns that inflation didn’t scream higher under tariffs as the Fed and so many market pundits had worried about.
So, what’s the deal with long-term interest rates remaining so high in the U.S. Jerome Powell actually started rate cuts in 2024 with three cuts (50/25/25 basis points each). And after this first cut of 2025 the U.S. Fed Funds rate is down to a target range of 4.00% to 4.25% after having peaked at a target range of 5.25% to 5.50% in 2023.
One problem facing the Fed is that these short-term rates are still quite close to longer-term rates — the 10-year Treasury yield was 4.15% heading into the government shutdown. That makes for a flat yield curve, and it requires a unique set of circumstances for longer-term bonds and notes to rally to the point of a yield curve inversion.
Oggonomics believes that it is good news that the Fed Funds rate is finally bringing short term rates lower. The bad news is that interest rates are still quite stubbornly high. And long-term rates have not come down with short-term rates.
What is becoming impossible to ignore, the elephant in room of international bond markets, is that the U.S. is having to pay a massive premium versus other major central banks around the world. The U.S. total government debt is currently almost $37.5 trillion in total government debt. The annualized interest payment is now over $1.13 trillion.
The U.S. keeps spending away on deficits being financed by more and more government debt. The translation, without looking at exceptions and intra-agency debt, is that the U.S. is now averaging around 3% in total interest rate payments on all of the debt.
- Japan 1.64%
- China 1.88%
- Germany 2.71%
- South Korea 2.95%
- Canada 3.13%
- Spain 3.20%
- France 3.54%
- Italy 3.54%
- U.S.A. 4.15%
- Australia 4.35%
- U.K. 4.70%
- India 6.54%
- Mexico 8.55%
- Brazil 13.60%
- Russia 14.80%
- Turkey 29.27%
- promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
- promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
- fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
- promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
In the end, this observation is that the U.S. just pays what is becoming an unjustifiable premium on its intermediate and long-term rates versus other nations like Germany, China, France, Spain, Italy and others. Maybe the good news here is that it isn’t paying the rates that India, Brazil, Mexico, Russia and Turkey have to pay to national and international borrowers.
The U.S. dollar is still the world’s reserve currency with over half of central bank reserves tied to U.S. dollars. If that is going to remain the case, more interest rate cuts on the short end of the yield curve will be needed to allow room for long-term rates to come down too. At that point, mortgage rates and other intermediate borrowing costs can come down as well. It may even help to ease that $1.1+ trillion in the United States’ annual debt servicing costs.
All of these observations come with an admission that it is the bond market itself that determine yields for longer-dated Treasuries. Getting to lower yields will require domestic buyers and international debt buyers to temper their expectations of longer-term yields. That doesn’t seem likely today, but what if short-term rates go down to 2.5% rather than just to 3.25% to 3.50% by the end of 2026?
