RENEE MONTAGNE, HOST:
And the U.S. Treasury borrowed $32 billion yesterday. It was a routine auction of Treasury bonds. What's remarkable is that those who bought the bonds at auction settled for a tiny return - an interest rate of one-half of one percent.
STEVE INSKEEP, HOST:
Here to explain why - why in particular the government with all its debt can sell bonds on such favorable terms - we turn now to David Wessel. He's economics editor of The Wall Street Journal. Good morning.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: Can we begin David, with the basic? How often does the government hold these bond auctions, and borrow this huge sum of money?
WESSEL: Well, the Treasury regularly borrows money, short-term, for a week or two. They do that almost every day. But about once a month they do these longer term bond auctions where they basically say to people, how much will you charge us to lend us money for - yesterday it was three years, today it'll be 10 years, tomorrow it'll be 30 years. And they accept the bids from those who are willing to lend to the government at the lowest rate.
MONTAGNE: And who are those lenders?
WESSEL: The Treasury doesn't give us a lot detail, but they do tell us that more than half the $32 billion they borrowed yesterday came from the two dozen or so big Wall Street firms that make their money by buying and selling government bonds. And about a third of the $32 billion came from a category that includes foreign central banks and foreign governments are looking for places to put their extra U.S. dollars.
MONTAGNE: Is that typical - two-thirds of bond investors, U.S. firms, a third of foreign buyers?
WESSEL: It is typical. It varies from auction to auction. But the Treasury estimates that at the end of last year, the U.S. government had borrowed about $10 trillion from investors around the world and about half that had been lent by foreigners, and about half that half was lent by the Chinese or the Japanese who have these big hoards of dollars they need to put somewhere.
MONTAGNE: So going back to that number - ten trillion - that's a huge amount of debt. We hear a lot about all the debt the federal government has run up just in the past couple of years. Usually when governments run up large debts, lenders get nervous, they demand higher returns. And that is not happening here so far. What is the situation? How come?
WESSEL: Well, that's a great question, Renee. So, you're right. The federal debt has nearly doubled in the past five years because the government - both the Bush administration and the Obama administration have borrowed a lot to kind of try and get the economy moving again. Yet, at today's auction, the government will be able to borrow another $20 billion for 10 years and the market indicate that they'll have to pay about two percent interest.
Well, given that inflation is running at about two percent now, that's almost like borrowing for free. Now there are a couple of reasons for this. One is that although the world economy isn't as scary as it was a couple of years ago when Lehman Brothers was collapsing, there are still a lot of investors who prize safety over high interest rates, and there's no safer place to put your money in the world, than the U.S. Treasury bond. Despite all the angst about the budget deficit and the gridlock in Congress, and what happened to our triple-A rating and all that, the U.S. still looks like a safer place to put your money. And as a result, the U.S. Treasury has been able to borrow extraordinary sums at very low interest rates.
Now a second factor is that the Federal Reserve has helped here too. They're using their muscle to keep interest rates low. Effectively, they're printing money and using it to buy bonds and that makes it easier for the treasury to borrow low.
MONTAGNE: If these mortgage rates - I mean, they're so cheap. In some sense, one wants to say isn't that like such a great, you know, like a great mortgage rate on your home. So that's a good thing, right?
WESSEL: Is a good thing but it won't last forever. The government's spending about $225 billion on interest now. That's as much money as the Commerce Department, the Education Department, the Energy Department, the Homeland Security Department, the Interior Department, the Justice Department, and the State Department spend combined. And that's with really low interest rates. So when interest rates go up, as they surely will, the government is going to have to pay a lot more money in interest and that will crowd out other spending.
MONTAGNE: And let's just talk briefly at the end here, about how this matters beyond the government and beyond those who are lending money to the government.
WESSEL: It matters quite a bit. Because when the government is able to borrow so cheap, that influences the interest rates that other people pay for other things. If you want a little more money, a little more return in your money, you have to go buy corporate bonds or something. So its pushed down interest rates all across the economy for people who borrow, but its also pushed down the interest rates that people get who save. It's why you get so little money when you put your money in a bank account now.
MONTAGNE: David, thanks very much.
WESSEL: You're welcome.
MONTAGNE: David Wessel of the Wall Street Journal. Transcript provided by NPR, Copyright NPR.