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Financial Health
October 30, 2020

Paying America’s bills amid a pandemic

With the U.S. federal budget deficit over $3 trillion, Brian Rehling of Wells Fargo Investment Institute provides an update to the report “Paying America’s Bills” during an unprecedented time when the government has stepped in to help stabilize the economy.

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Financial Health
October 30, 2020

Paying America’s bills amid a pandemic

With the U.S. federal budget deficit over $3 trillion, Brian Rehling of Wells Fargo Investment Institute provides an update to the report “Paying America’s Bills” during an unprecedented time when the government has stepped in to help stabilize the economy.

Brian Rehling, head of global fixed income strategy for Wells Fargo Investment Institute and author of the report “Paying America’s Bills (PDF),” discusses what investors need to know about how the U.S. government manages its finances.

Black text on yellow background: Q: What is our current debt and deficit?

At $26 trillion, our debt is certainly staggering compared to $21.3 trillion just two years ago. The budget deficit for fiscal year 2020 is about $3.3 trillion. These are currently manageable amounts — what’s troubling is the prospect for its continued growth over the long term.

Black text on yellow background: Q: How did the federal stimulus in 2020 change the federal deficit landscape?

This year and into 2021, we’re going to see a significant increase in the yearly deficit the government is running. This will add to the overall debt, and we’ll see that return to more normal levels in the years ahead. The (stimulus) spending was really required to help businesses, help consumers, and help everyone in the country make it through what’s been a very difficult economic response to the pandemic.

Black text on yellow background: Q: In your opinion, how has the Treasury Department fared in paying America's bills?

The Treasury Department is tasked with making sure all those bills get paid. They do that by issuing debt. Remarkably, despite the significant increase in debt that the Treasury has issued, we’ve seen interest rates remain and actually fall to extremely low levels. There’s a tremendous amount of demand even for this increased amount of Treasury securities. We believe the Treasury has done a good job of managing the debt expense and making sure all the bills are paid and doing so at a very low cost.

Black text on yellow background: Q: How do low interest rates affect the deficit?

Since the debt and the deficit need to be financed, a low-rate environment is extremely helpful in terms of paying those bills to keep costs lower. That has been very beneficial during this period of deficit spending. Where we become concerned is that over time, those interest rates start to increase. As that debt matures and needs to be refinanced, the expenses are greater and consume a larger portion of the annual government budget.

Black text on yellow background: Q: How can the deficit impact U.S. investors?

We don’t expect a crisis, but the large debt levels are likely to reduce the financial flexibility of the government in future crises. It’s also likely to keep interest rates relatively low because the government does not have that ability to spend more money. That reduced flexibility tends to lead to lower growth rates and lower interest rates over time. For investors who are in retirement or approaching retirement, this low-rate environment is likely to persist. Investors should think about how they manage their assets in that type of environment. Look for opportunities to add yield and for opportunities that could potentially outperform what’s likely going to be a very low-rate environment well into the future.


Wells Fargo Investment Institute explores the basics of the rising U.S. debt in this 2018 Wells Fargo Stories article.


Risks

The opinions expressed reflect the judgment of the speaker as of Oct. 27, 2020, and are subject to change without notice. The material has been prepared for or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

Risk Considerations

Past performance is no guarantee of future results. All returns quoted are as of Oct. 27, 2020. Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

All investing involves risks including the possible loss of principal. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk, they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

General Disclosures

Wells Fargo Investment Institute Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this call.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. Do not use as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker dealer and nonbank affiliate of Wells Fargo & Company.

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