Revisiting the Relationship Between Debt and Long-Term Interest Rates: Working Paper 2024-05

By Andre R. Neveu (FDIC) and Jeffrey Schafer.

In forming its long-run projections of the interest rate on 10-year Treasury notes, the Congressional Budget Office estimates that a 1 percentage-point increase in the projected ratio of debt to gross domestic product raises average long-run interest rates by 2 basis points (bps). The agency refers to that estimated relationship as the debt sensitivity of interest rates (DSIR). Here we extend the sample used in a previous CBO working paper to empirically estimate the DSIR and explore the relationship’s stability over time. Extending the sample through 2023 yields an estimate of the coefficient on debt in our regression equation of 2.0 bps, and analysis using recursive regressions shows that the coefficient estimate has been stable over recent history. Estimating the regression equation over the subsample between two possible breaks in the relationship—a subsample during which the monetary policy regimen resembled the one CBO projects in the long run—yields a nearly identical value.