The 2020 Long-Term Budget Outlook

In light of those sources of uncertainty, CBO relies not only on economic models and findings from the research literature but also on information from financial markets to guide its assessments of the effects of various factors on interest rates over the long term. The current rate on 30-year Treasury bonds, for example, reflects market participants’ judgments about the path that interest rates on short-term securities will take 30 years from now. The rate on 30-year Treasury bonds since the onset of the recession caused by the pandemic points to considerably lower interest rates well into the future than the interest rates of recent decades.

Projections of Interest Rates. The nominal interest rate on 10-year Treasury notes is projected to average 3.3 percent over the 2020–2050 period and to reach 4.8 percent in 2050. The real interest rate on 10-year Treasury notes is projected to average 1.1 percent over that period and to be 2.5 percent in 2050.

The average interest rate on federal debt held by the public tends to be lower than the rates on 10-year Treasury notes because interest rates are generally lower on shorter-term debt than on longer-term debt and because Treasury securities are expected to mature, on average, over periods of less than 10 years.21 CBO projects a 0.4 percentage-point difference between the rate on 10-year Treasury notes and the effective rate on federal debt over the 2020–2050 period. That difference is projected to average 0.5 percentage points over the next decade. The difference is larger before 2031 because the federal debt consists of the Treasury securities issued during the recession caused by the pandemic. CBO projects the difference to decrease to 0.3 percentage points by 2035 as the earlier securities with relatively low interest rates mature, and to remain at 0.3 percentage points thereafter. The same factors that increase interest rates would also increase the effective interest rate on federal debt held by the public between 2040 and 2050. In CBO’s projections, the average nominal interest rate on federal debt held by the public is about 2.9 percent for the 2020–2050 period, reaching 4.4 percent in 2050.

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