Investing Questions Exclusively Answered by Our Experts

This website offers three (3) user-driven Question & Answer features. One -- the Subscriber Q&A -- is exclusively focused on questions related to our flagship newsletter service and only for subscribers. The FAQ (Frequently Asked Questions) feature also available in the Education menu is mostly for website use and general customer service questions. But THIS one is for ALL followers -- subscribers or not -- and is focused on investor-driven educational topics.

Our followers ask questions. We differ from many competitors by LISTENING and trying to answer up to every question. Sometimes the answers are better suited for delivery in an existing or future special report, webinar of investing insight topic. Sometimes the questions better fit in one of the other Q&A features. However, when we are asked a question that -- if answered well (which is the only way we do it) -- will be of interest to our followers as a whole, it very well may be posted here as soon as we can. Below find a batch of recently-asked questions and well-developed, all-original answers. Click the question bar to reveal the answer. Click another question bar to close one question and open another.

What is the risk with US interest rates and credit rating?

The most important price in the global economy is the 10-Year US Treasury yield. This is because it is considered the global “risk-free” rate, since US Treasuries are considered “risk-free”. That is because the US government is the biggest and most powerful government the world has ever seen and can tax and print money at will to pay its debts.

The 10-Year US Treasury yield is driven by supply and demand, like all prices. Supply increases when the US government spends more than it taxes and has to borrow money by issuing bonds. Supply decreases when the US pays off debt, which rarely happens these days. Rising Treasury supply leads to higher interest rates, all else equal. Demand is driven by global investor decisions. A key factor for demand is how much inflation and US debt risk investors believe there is.

Treasury Yields Are Rising

Due to the highest inflation rates in 40 years resulting from the Fed’s 40% increase in the money supply in 2020, as well as continued out-of-control Federal spending, the 10-Year US Treasury yield has risen eight-fold in the past five years, from 0.55% in mid-2020 to 4.54% now. One important consequence of this rise that impacts all current and future US homeowners is the 30-Year mortgage rate has more than tripled from 2.65% in early 2021 to 6.86% now.

As the chart below shows, the 10-Year yield has risen above the downward sloping trend line that contained falling yields for about four decades, as well as the horizontal trend line that contained yields since the Great Recession. This is a message from the market that yields are more likely to rise than fall going forward.

10-Year

The Problem Is Reckless Spending By Politicians

This chart shows that the Federal budget deficit has exploded over the past decade as politicians have been spending like there is no tomorrow. At this rate, they might be right, as the deficit is now about 6% of GDP.

Deficit

As a result of these record deficits, the Federal debt has risen more than 50% since covid, as this chart shows. Federal debt is now a whopping 120% of GDP.

Debt

Due to the double whammy of much higher interest rates and higher debt, Federal interest expense has more than doubled over the past five years. It is now the second largest line item in the Federal budget after Social Security, as shown here.

Interest expense

US Credit Rating Downgrade

A little over a week ago, Moody’s was the last of the three major credit rating agencies (after Fitch in 2023 and S&P in 2011) to lower the US Federal debt rating to Aa1, one level below AAA. As this chart shows, this is the first time since 1917 that Moody’s lowered the US Federal credit rating below AAA. It never cut the rating even throughout numerous crises like the Great Depression, World War II, 1970s “stagflation” and the Great Recession.

Moody's

Here is Moody’s rationale for the US credit rating cut:

"Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits.
During that time, federal spending has increased while tax cuts have reduced government revenues.
As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024.
If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.
We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability.
Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US' long-term growth will be significantly affected.
Despite reserve diversification by central banks globally over the past twenty years, we expect the US dollar to remain the dominant global reserve currency for the foreseeable future.
Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles."

So Much For Trump Cutting Spending

A government debt crisis typically begins when interest expense rises faster than GDP and there’s no credible plan to reverse it. That is happening now, particularly with Trump’s "One Big Beautiful Bill Act”. According to the CRFB, this spending bill would raise the deficit to 7% of GDP in 2027 and nearly 8% in 2034, more than the double Treasury Secretary Bessent’s 3% target, as shown here.

Bill

This chart shows the expected annual increases in the Federal deficit from the spending bill, based on the Congressional Budget Office's estimates. They expect the bill will add $3.1 trillion, or about 10%, to the Federal debt. Nice.

Deficit forecast

Recent Treasury Bond Auction Was A Bust

US Treasury bond yields have been rising because there are fewer buyers to absorb the never ending flood of debt being issued by the Treasury. This was shown in the latest 20-Year Treasury bond auction.

The 20-Year Treasury yield determined at the auction was 5.047%, well above the average of the past six auctions at 4.613%. In addition, in order to sell all the bonds at that rate, the Federal Reserve had buy about $2.2 billion, or nearly 14%, of the $16 billion bond issue. In fact, in recent days, the Fed bought $43.6 billion in Treasuries.

The Fed has been selling Treasuries as part of its “Quantitative Tightening” program, but now it is buying Treasuries. No wonder inflation expectations and interest rates are rising!

Debt Crisis Risks

While the US government can theoretically pay off its debt with some combination of less spending, higher taxes and more money printing, the bottom line is a country with a low debt-to-GDP ratio of 20% has a lot more options than a country like the US with debt at 120% of GDP.

If this reckless spending, money printing and debt issuance continues, it could trigger a Federal debt crisis with much higher interest rates on Treasuries, mortgages, corporate bonds and all other debt. As Mark Zandi, the chief economist at Moody’s Analytics, recently said, “At some point, everything just goes parabolic. That’s when parts of the financial system might start to break.”

Then the Federal government will be left with having to slash spending, even on key areas like Social Security, Medicare and defense. Or raise taxes a lot. Or print a lot more money, which could lead to hyperinflation. Or default on the debt. At least the positive of a debt default is investors would be much more reluctant to lend to the government again, forcing it to live solely on tax revenue.

What About DOGE?

Elon Musk's “Department of Government Efficiency” (DOGE) initially set a goal of cutting $2 trillion from US Federal spending, which is nearly one-third of the budget. As of now, DOGE claims to have saved only $160 billion. While that is bad enough, some analysts argue these cuts may have cost about $135 billion due to productivity losses and re-hiring expenses.

The reality is it is nearly impossible to make government bureaucracies more efficient. The only solution to preventing a US debt crisis is to permanently abolish as many government programs and agencies as possible. Of course, that won’t happen until there is a major debt crisis. Meanwhile, the debt clock keeps ticking.

Investment Implications

It looks like higher interest rates and higher inflation are in our future. That is bearish for bonds and stocks and bullish for gold and silver. Bitcoin is a wildcard. It should be bullish for Bitcoin, but since Bitcoin has been highly correlated with stocks historically, it is more likely to be bearish.

TOUR