How much extra interest will the US government have to pay for its treasuries if the Fed stops purchasing treasuries today?

-- Its yearly interest payment will increase by as much as $30B in one year after the Fed stops buying.
-- The number may grow to as much as $200B in 5 years.
-- Correspondingly, a 50bps interest rate hike can easily lead to $30B extra yearly interest payment.

According to our previous analysis, the potential increase in corporate borrowing costs as a result of tapering can be easily diluted by the growth in profits that companies are continuously gaining in the current inflationary market circumstance.

In another word, the help, to corporate’s  new investment and thus new hiring, from Fed’s $80B monthly purchase of treasuries is seriously limited and neglectable. In fact, the only confirmed role that Fed’s purchase is playing is to lower borrowing costs. For example, cheap money has been seen, in our previous analysis, to play a role in contributing more than half support to the current rally in the stock market.

However, the more important role it plays is, certainly, to help lower the government’s borrowing costs. Our analysis indicates that the US government’s interest payment for their treasuries may increase by as much as $30B one year after the Fed stops purchasing, a number 4 times more than the interest they usually pay for the borrowing to offset the federal deficit in a normal year and at current rates.

The extra interest payment of $30B estimated will mainly be because tapering drives up borrowing costs for longer than 2 years treasury notes and bonds. As newly issued treasuries replace existing ones and issuances of new treasuries increase, if the Fed does not pick up QE again the extra interest burden will double in the second year and go as high as $200B in 5 years, a number roughly equal to a whole year’s revenue from corporate tax.

As compared with the tapering-driven treasuries yield increase, estimated to be as much as 55 bps and weighing primarily on long maturity treasuries, a 50 bps interest rate hike can easily create a similar pressure on interest payment of treasuries since it has a direct impact on both short and long maturity treasuries.
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