Assessing the Costs of Rolling Over Government Debt

Abstract

Committee (FOMC) has raised the federal funds target rate from near zero to around 5%. This has driven up other rates—mortgages, US Treasuries, bank loans, etc. Given the high speed at which rates have risen, there are concerns about the cost of rolling over the existing debt for firms, households, and governments. Specifically, when debt matures, issuers must decide whether to “roll over” their debt—by issuing new debt at the current rate—or find other resources to repay the debt. Take for example a small business owner who, in 2020, at the beginning of the COVID-19 crisis, borrowed at a 3% interest rate with a three-year maturity. This year, when the owner returns to the bank to discuss the rollover of the loan, they will likely be quoted a rate that is double to triple their existing rate. This creates a difficult choice for the business owner: maintain the same amount of debt and pay double or triple in interest or reduce their level of debt and cut costs. This trade-off applies to any debt issuers, e.g., the US government. In the fourth quarter of 2022, the total public debt, according to the US Treasury Department, was just over $31.4 trillion.1 Below, we show a breakdown of this debt: Assessing the Costs of Rolling Over Government Debt