Monday, March 27, 2000
YOUR MONEY
National debt owed to citizens
BY AMY HIGGINS
The Cincinnati Enquirer
When the U.S. government wants to pay off its debt, it doesn't write a check to Visa as most of us would.
The government is mostly in debt to you and me. That huge 12-zero figure that politicians and economists keep bandying about? That's owed largely to citizens of the country, not some big, toe-tapping, impatient
banker.
Of the $5.7 trillion national debt, $3.6 trillion is held by the public. Even if you don't hold Treasuries outright, the chances are your pension fund or mutual fund does.
Since when did we become lenders of choice? Since we started investing in government securities, specifically Treasury bonds, notes and bills. Each of these securities is like a big IOU — we give the government our money when we buy a Treasury bond, note or bill in exchange for it paying us interest and eventually our money back.
It's true — people do willingly give money to the government.
"Full faith and credit'
It works out well for both sides. First, the government gets good cash flow to fund everything from the Defense Department to the National Park System.
Your benefit is that you get the safest investment in the world. The U.S. government has never failed to pay back what it owes to holders of its securities.
“They are backed by the full faith and credit of the United States government,” said Tom Seay, senior vice president and fixed income portfolio manager at Gradison McDonald Asset Management in Cincinnati. “They actually have a direct tie to the U.S. Treasury.”
You also get the opportunity for a decent rate of return. The most recently issued “long bond,” or 30-year Treasury bond, is paying 6.25 percent interest a year. So if you bought a $1,000 long bond at the auction, you would get paid $62.50 a year (in $31.25 payments every six months) before getting your principal back in 2030.
Buyback effect
But the interest is even higher on the 30-year bonds sold between 1985 and 1990. The coupon interest rates on many of those securities ranged between 8.871/2 percent and 11.25 percent.
With such high interest payments, it's understandable why the government chose those bonds to buy back with $1.345 billion of the budget surplus. More such buybacks are planned.
But there's more than $150 billion of that type of repurchased bond — making Mr. Seay think that the buyback is more political than financial.
“It's truly just a drop in the bucket,” he said. “It does have an impact on some people, but I just don't think it's as big a deal as most people do.”
In fact, the deal isn't necessarily a good one for individuals holding Treasury securities. Selling that back would be giving up a higher coupon rate than the newer bonds are paying. Plus selling it back might trigger capital gains taxes.
“To me, that's not a good deal,” he said.
No short supply of debt
While the government is buying back some of its bonds, it's also tending to issue fewer of the 30-year bonds in favor of more shorter-term securities.
Almost one-third of the investment grade market (not counting high-yield, or “junk,” bonds) are Treasury notes and bonds, as represented in the Lehman Brothers U.S. Aggregate Index, Mr. Seay said.
“You're taking out a big borrower or minimizing their role,” he said.
Between other Treasuries and rising corporate issues, there's still plenty to go around, Mr. Seay said.
“The overall size of the debt market is growing rapidly,” he said. “It's bigger than it ever has been.”
Amy Higgins writes about personal finance for The Enquirer. You can reach her at 768-8373; ahiggins@enquirer.com; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.
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