Bonds, Interest Rates and Lost Opportunities

Despite Republicans’ anti-spending sentiment that’s pervaded Washington for the last few years, a new report by the Financial Times shows that U.S. treasury bonds are currently selling at such a low interest rate that it may be more financially sustainable for the government to borrow more, not less. Furthermore, doing so could have enormous benefits for the states.

The last sale of 10-year bonds sold at a yield of 1.459 percent -- the lowest ever in an auction. As the Washington Post’s Ezra Klein pointed out, adjusting for inflation, this actually makes the interest rate negative, and the Times suggests that U.S. interest rates may remain low for several years.

While the real net gain the federal government will receive from bonds isn't much, it means that it’s borrowing what essentially amounts to free money -- money that if invested in the states, could benefit them greatly. For example, if the federal government sends some of the money from the sale of bonds to the states, they could make desperately needed infrastructure improvements that in turn could create jobs and boost the economy. As a result, the federal government would receive extra income through tax receipts.

Then, in 10 years, the government would pay back the exact same amount of money -- slightly less, actually -- but keep the extra income from tax receipts. This means a net gain for the federal government that would also result in increased investment for the states. “The fact that we’re not doing any of this isn’t just a lost opportunity,” writes Klein. “It’s financial mismanagement on an epic scale.”