US Treasury Interest rates have been rising in recent weeks. We’ll discuss where the interest on treasury bonds comes from and what higher rates can mean for investors. US Treasurys are yielding between a 5 and 5.5 percent annual rate for maturities under 2 years. That's higher than we have seen for a long time.  

Rates Moving Higher 

The US Federal Reserve influences short-term interest rates. Over the past 20 months, they have been on a path of increasing rates to combat inflation. The marketplace and economic forces, broadly, influence longer-term interest rates.  

Interest on Treasury Bonds 

In 2023, the projected interest cost on outstanding Treasurys is around $663 billion. This amount covers just the interest payments owed on the existing $33 trillion in US debt. This does nothing to reduce the principle. 

The U.S. Treasury pays interest on its bonds from US general revenue collected, which is primarily tax revenue. Individual income and payroll taxes make up most, 85%, of the revenue collected by the government. In years like the last 20, where there is a budget deficit, new debt issuances (Treasurys) may be used to fund interest payments, among other expense items.   

At some point, we will hit peak interest rate levels for this cycle.  We believe based on current data that it could be sometime between now and the middle of next year. Looking back at prior cycle peaks for short-term bond-type investments, the years following a rate cycle peak tended to be good for other asset classes such as stocks.  

The takeaway here is that investors should not trade all their long-term investments to lock in an enticing short-term interest rate. It is not because the guaranteed short-term rate isn’t good, but rather the opportunity cost can be greater.