[CNBC contributor Larry Kudlow urges that the U.S. start issuing much longer maturities of government bonds, possibly experimenting with 50-year debt issuance, and maybe go out as long as 100 years. Kudlow’s a smart guy with a wealth of experience and his article is well worth reading.]
If President-elect Donald Trump’s economic growth plan — slashing business and personal marginal tax rates and rolling back costly business regulations — is achieved next year, the economy could break out with 4 to 5 percent growth. And that means much higher interest rates.
This rate rise will be growth-induced, a good thing. Higher real capital returns will drive up real interest rates. And inflation will likely remain minimal, around 2 percent, with more money chasing even more goods alongside a reliably stable dollar-exchange rate.
We’re already seeing some of this with the big post-election Trump stock rally occurring alongside a largely real-interest-rate increase in bonds.
And what that says is the time to act is now.
The average duration of marketable Treasury bonds held by the public has been five years for quite some time. Almost incredibly, Treasury Department debt managers have not substantially lengthened the duration of bonds to take advantage of generationally low interest rates. Hard to figure.
Treasurys held in public hands have moved up from 32 percent of GDP back in 2008 to 74 percent today. Interest expense for fiscal 2016 is nearly $250 billion. So if Treasury debt managers had significantly lengthened their bond maturities, they would have saved taxpayers a bundle.
Now, with new economic-growth policies poised to drive up average Treasury rates to perhaps 6 percent, the Treasury folks better get moving fast to capture today’s historically low yields. Up to now they’ve been sleeping at the switch.