PropTech Challenge and Yacht Party, Nov. 29th | NYC REAL ESTATE TECH WEEK →

Interest Rate Hikes Might Bump Up Against the Debt Ceiling

Subscribers Only Newsletter
Propmodo’s weekly perspective on commercial real estate and things interesting to real estate executives. Curated by Franco Faraudo. View Archive Become a Subscriber

A battle is brewing on how the US government will pay its expenses. The debt ceiling needs to be raised again, like it has 78 times since the 1960s. But this time might be different. Republicans now control the House of Representatives and, thanks to new rules adopted last week, there is now no way to get around a full House vote. Most of us can still remember the last time that the ceiling didn’t get raised. Back in 2013, between February 4 and May 19, the Federal Government had to cut back on some of its spending in response to a freeze in its revenue. That meant that things like social security benefits and paychecks to government employees and contractors did not get paid. Eventually, the ceiling was raised but only after then President Obama agreed to scale back his signature legislation, the Affordable Care Act.

The political landscape right now is as divided as ever, so a fight is almost certain. The President has said that he will not negotiate on raising the limit to keep the US solvent but the new Republican House majority has said that they want to see at least some spending cuts before they will pass it. But as contentious as the battle might be, both parties will be up against an even more stubborn foe: math.

Raising the debt ceiling means that America gets to take on more debt in the form of Treasury bonds. Right now Treasury bonds pay between 3.59 and 4.66%. With current debt of $31.4 trillion, the government paid around $475 billion in debt payments, a big jump from the around $350 billion the two years before. This jump in payments is due less to an increase in the amount of debt and more to the price of the debt thanks to the new interest rate. The average rates on Federal bonds were .5 percent in 2020, .1 percent in 2021, and 1.9 percent in 2022. But these payments are only going to go up now that interest rates have spiked. 

Starwood Capital CEO Barry Sternlicht was sounding the alarm about this increase this week on CNBC. “This year [rates] will be around 4.5 to 5 percent,” he said. Five percent of the over thirty trillion dollars that the government has in debt currently would be over a trillion dollars. Any further increase in debt would only add to that. “The budget that the White House put out has the $400 billion number, they didn’t update it for today’s interest rate,” Sternlicht added. The concern is that these debts would eventually have to get paid by printing new dollars, which would further spur inflation and force rates even higher.

The debt ceiling has already technically been hit but the Fed has been able to move money around to keep its bills paid, for now. They have set a June deadline for the new debt ceiling to be agreed upon. After that we will be in the same place we were in 2013, except this time we will not have the low interest rates that allowed us to borrow more without a substantial increase in payments. Property owners with loans expiring soon are rightfully worried that rates won’t come down before they need to refinance. At least they can find solace in the fact that the organization that sets the rates is in the exact same situation. 



Here is a great breakdown of exactly where the Fedral government makes and spends its money.

On the agenda for the newly Republican controlled House of Representatives is a bill that would require hundreds of thousands of Federal employees to return to the office. (CBS)

A sustainable construction marketplace called Energy X has raised $20 million with plans to expand into building energy management systems. (TechCrunch)

Looming rate increases in commercial real estate debt has been identified as one of the largest risk factors for Swedish banks. (Reuters)

Image - Design