Good deal: U.S. Treasury borrows $44 billion for 1%

By Money Matters Editors

The inflation hawks continue to circle, but for the duration of the U.S. Federal Reserve’s unprecedented quantitative easing and credit market intervention, they’ve been circling in vain.

Case in point: With more than $23 trillion pumped into the financial system via monetary and fiscal policy in the last 12 months, there’s good reason to fear a rise in inflation, particularly if the U.S. Federal Reserve’s quantitative easing is not withdrawn in time.

Further, rising inflation, in conjunction with capital from abroad would invariably lead to rising interest rates in the United States, the critics charge, but so far, higher interest rates have not manifested themselves. One example: The U.S. Treasury last week sold $44 billion in two-year notes for 0.802%, Bloomberg News reported. In other words it borrowed $44 billion for less than 1% - an astoundingly low rate. Can you believe it? $44 billion for under 1%. If only the mortgages of Money Matters’ Editors were that low! If you’re a business owner, imagine what borrowing at 1% would do for your bottom line?

What’s keeping interest rates low? There remains a great deal of demand from institutional investors (IIs) for safe investments, and U.S. Treasuries are about as safe an instrument as one can get. Also, at least a portion of these IIs belief the bull market in stocks in the U.S. and abroad this year has gotten ahead of economic fundamentals – i.e. that higher-risk investments may not generate the return many in investing circles expected. If these bearish IIs are right, and stock markets correct or tumble 20% or 30%, Treasuries will in hindsight look like a good investment.

The benefit for U.S. taxpayers? Obviously the low rates are gratifying, in that they lower the U.S. government’s financing costs for its large budget deficit and national debt. The low rates should be not serve as an excuse for Washington’s policy makers to avoid cutting the budget deficit – including passing the health care reform bill that will finally contain Medicare and Medicaid spending – but for now, policy makers can move forward knowing that the U.S. can borrow the hundreds of billions of dollars to service its debt at a reasonable rate.