In­ter­est rates in the Unit­ed States are mov­ing up. On Fri­day Sep­tem­ber 11, the yield on the US 10-year Trea­sury bond closed at 4.96 per cent while the 30-year bond yield­ed 5.35 per cent.

At the start of Jan­u­ary those yields were 4.19 per cent and 4.86 per cent re­spec­tive­ly. These are huge moves in in­ter­est rates and it means that the US Gov­ern­ment is now pay­ing close to 5 per cent to bor­row mon­ey for 10 years and more than 5 per cent to bor­row for 30.

This may seem like an Amer­i­can prob­lem, but the re­al­i­ty is that US Trea­sury rates in­flu­ence the price of mon­ey across the world and there are con­se­quences for T&T. The US 10-year trea­sury rate is a bench­mark rate that af­fects the com­pe­ti­tion for cap­i­tal (mon­ey) even here in T&T.

But let’s start the sto­ry in the US. The 10-year Trea­sury yield in­flu­ences mort­gage rates, cor­po­rate bor­row­ing and the val­ue in­vestors place on fu­ture in­come. The Fed­er­al Re­serve con­trols an overnight in­ter­est rate and you would be read­ing this af­ter yes­ter­day’s rate an­nounce­ment. It does not di­rect­ly set a 30-year mort­gage rate as the longer rates are more mar­ket dri­ven.

Last week, the av­er­age US 30-year mort­gage rate was 6.76 per cent. On a US$400,000 mort­gage, the prin­ci­pal and in­ter­est pay­ment is ap­prox­i­mate­ly US$2,596 per month. A rate one per­cent­age point low­er re­duces this by about US$259. The US is a mo­bile so­ci­ety where peo­ple move in search of jobs and op­por­tu­ni­ty but now sell­ing a home to move means giv­ing up an old­er, cheap­er mort­gage and bor­row­ing at to­day’s rate.

The peo­ple af­fect­ed first are new buy­ers, prop­er­ty de­vel­op­ers and busi­ness­es seek­ing fi­nance. Cred­it cards are linked more di­rect­ly to the Fed­er­al Re­serve’s short rate while ve­hi­cle loans re­flect the wider cost of mon­ey. Savers can earn more on de­posits and mon­ey mar­ket in­vest­ments. But a safe US Gov­ern­ment se­cu­ri­ty yield­ing around 5 per cent be­comes a strong com­peti­tor for mon­ey that may oth­er­wise go in­to prop­er­ty, shares or an­oth­er coun­try.

The bot­tom line is that in­vestors now want more com­pen­sa­tion. High­er oil prices, per­sis­tent in­fla­tion and large Gov­ern­ment and cor­po­rate bor­row­ing, es­pe­cial­ly for AI in­fra­struc­ture, are com­pet­ing for the same cap­i­tal.

The rollover

The tim­ing of this high­er rate pro­file presents an­oth­er chal­lenge be­cause the Unit­ed States is ap­proach­ing a large re­fi­nanc­ing year. As at Au­gust 31, ap­prox­i­mate­ly US$8.29 tril­lion of mar­ketable US Gov­ern­ment se­cu­ri­ties al­ready out­stand­ing were sched­uled to ma­ture dur­ing fis­cal 2027. The com­pa­ra­ble fig­ure go­ing in­to fis­cal 2022 was US$5.43 tril­lion. The amount to be rolled over has there­fore in­creased by ap­prox­i­mate­ly 53 per cent in five years.

The way it works is that most of this old debt will be re­paid by is­su­ing new debt. But debt is­sued when rates were low­er must now be re­fi­nanced at to­day’s high­er rates. The av­er­age rate on in­ter­est-bear­ing US fed­er­al debt was 1.97 per cent in Au­gust 2022 and 3.49 per cent this Au­gust. Every low rate se­cu­ri­ty re­placed at a high­er rate in­creas­es the in­ter­est bill.

There is al­so new bor­row­ing to fi­nance the bud­get deficit. Pri­ma­ry deal­ers es­ti­mate ap­prox­i­mate­ly US$2.11 tril­lion of pri­vate­ly held net mar­ketable bor­row­ing in fis­cal 2027. Add the sched­uled ma­tu­ri­ties be­ing rolled over and the low­er es­ti­mate of gross fund­ing ac­tiv­i­ty is a mas­sive US$10.4 tril­lion.

The in­ter­est cost on this is al­ready show­ing up. The Con­gres­sion­al Bud­get Of­fice projects net fed­er­al in­ter­est of US$1.108 tril­lion in fis­cal 2027 com­pared with US$475 bil­lion in 2022. This ab­sorbs mon­ey oth­er­wise avail­able for ser­vices or in­vest­ment such as in­fra­struc­ture and adds to fu­ture deficits.

To be clear, the is­sue here is not whether there will be buy­ers for this huge amount of US debt is­suance. The an­swer is al­most cer­tain­ly yes. The US is­sues the world’s prin­ci­pal re­serve as­set and op­er­ates the deep­est Gov­ern­ment bond mar­ket. Mon­ey mar­ket funds, banks, pen­sion funds, in­sur­ers and for­eign in­vestors re­quire Trea­sury se­cu­ri­ties. The con­cern is not whether some­one will buy the debt but rather the rate they will de­mand to buy it.

The Fed­er­al Re­serve met ear­li­er this week to dis­cuss its bench­mark re­po rate. That an­nounce­ment is not known at the time of pub­li­ca­tion. In Ju­ly the Fed vot­ed nine to three to hold, with three mem­bers favour­ing a quar­ter point in­crease.

A Reuters sur­vey found 65 of 93 econ­o­mists ex­pect­ed a hold while 28 ex­pect­ed an in­crease. My ex­pec­ta­tion, giv­en that I am writ­ing be­fore the meet­ing, is that the Fed will hold rates but I al­so don’t ex­pect that rates will fall any time soon.

Au­gust con­sumer in­fla­tion was 3.4 per cent, core per­son­al con­sump­tion ex­pen­di­ture in­fla­tion was 3.3 per cent in Ju­ly and pro­duc­er prices in­creased 5.4 per cent over the year. With un­em­ploy­ment at 4.1 per cent these are not com­fort­able con­di­tions for the US Fed­er­al Re­serve’s stat­ed two per cent in­fla­tion tar­get.

On the oth­er hand, Trea­sury and mort­gage rates that we dis­cussed ear­li­er are al­ready tight­en­ing fi­nan­cial con­di­tions. The Fed can hold while us­ing its state­ment and pro­jec­tions to sig­nal that an­oth­er in­crease re­mains pos­si­ble.

An in­crease would quick­ly af­fect cred­it cards and vari­able loans and may strength­en the US dol­lar. It will not nec­es­sar­i­ly re­duce long term yields be­cause they re­flect in­fla­tion, Gov­ern­ment debt sup­ply and the risk of lend­ing for decades, not sim­ply the overnight rate.

For­eign ex­change

Now let us ap­ply this sit­u­a­tion to T&T.

Our Cen­tral Bank re­po rate is 3.50 per cent. By May, the three month-T&T Trea­sury bill mi­nus US Trea­sury was al­ready neg­a­tive 92 ba­sis points. A lo­cal in­vestor can there­fore earn more on the com­pa­ra­ble US in­stru­ment be­fore con­sid­er­ing cur­ren­cy risk. If you are go­ing to earn more in US dol­lars than in TT dol­lars this cre­ates an ob­vi­ous de­mand for US dol­lars for in­vest­ment pur­pos­es.

High­er US yields there­fore change be­hav­iour. Im­porters have an in­cen­tive to se­cure US dol­lars ear­li­er, savers and in­sti­tu­tions have more rea­son to hold US as­sets and ex­porters may have less rea­son to con­vert their for­eign earn­ings be­fore they need T&T dol­lars. These trends are al­ready in place, the high­er in­ter­est rates in the US are am­pli­fy­ing the trend.

Un­der our man­aged ex­change rate this pres­sure will ap­pear (as has been the case be­fore) in the form of longer wait­ing times, low­er al­lo­ca­tions, card lim­its and a wider dif­fer­ence be­tween the of­fi­cial rate and the price peo­ple pay else­where.

From Jan­u­ary to April this year, au­tho­rised deal­ers pur­chased US$1.35 bil­lion from the pub­lic and sold US$1.84 bil­lion. The short­fall was US$491 mil­lion and the Cen­tral Bank sup­plied US$400 mil­lion. For all of 2025, the short­fall was US$1.43 bil­lion and Cen­tral Bank in­ter­ven­tion was US$1.29 bil­lion.

Net of­fi­cial re­serves stood at US$5.75 bil­lion in Ju­ly, equiv­a­lent to 6.7 months of im­ports. This was an im­prove­ment from the mid­dle of last year but be­low the US$6.83 bil­lion at the end of 2022 and rough­ly half the US$11.5 bil­lion held in 2014.

Ju­ly’s in­crease was al­so large­ly as­so­ci­at­ed with a US$800 mil­lion ex­ter­nal bond is­sued by the Gov­ern­ment. Bor­row­ing US dol­lars can strength­en the re­serve po­si­tion to­day but the bond car­ries in­ter­est and prin­ci­pal that must be re­paid in the fu­ture. It is not the same as earn­ing more for­eign ex­change from ex­ports.

High­er en­er­gy prices may help but this de­pends on pro­duc­tion, con­tracts, tax pay­ment dates and whether the earn­ings en­ter the do­mes­tic mar­ket. It is ex­pect­ed that some vis­i­bil­i­ty and clar­i­fi­ca­tions on these mat­ters will come dur­ing the up­com­ing bud­get pre­sen­ta­tion and de­bate.

Re­gard­less our choic­es are un­com­fort­able. Rais­ing lo­cal in­ter­est rates can im­prove the in­ter­est rate dif­fer­en­tial with the US but it will in­crease bor­row­ing costs and weak­en an al­ready slow econ­o­my. Sell­ing re­serves helps to sup­port the ex­change rate but re­duces the pro­tec­tion avail­able for the next shock and our re­serves are al­ready 50 per cent be­low their peak. Ad­min­is­tra­tive al­lo­ca­tion keeps the of­fi­cial price sta­ble while trans­fer­ring the ad­just­ment to avail­abil­i­ty and wait­ing time.

This is there­fore not a prob­lem for the Cen­tral Bank alone. Fis­cal pol­i­cy has to re­strain con­sump­tion that us­es for­eign ex­change with­out cre­at­ing it es­pe­cial­ly in the face of bac pay pay­outs. En­er­gy pol­i­cy has to con­vert re­serves in the ground in­to pro­duc­tion as quick­ly as pos­si­ble and trade and in­vest­ment pol­i­cy has to sup­port ac­tiv­i­ties that earn or save for­eign ex­change.

Some of this is be­ing done and the Bud­get will bring more de­tails but the move­ment in US in­ter­est rates over the course of this year means that time is not re­al­ly on our side.

Ian Nar­ine is a fi­nan­cial con­sul­tant who un­der­stands that the price of mon­ey can change even when the ex­change rate does not move. Please send your com­ments to ian@ian­nar­ine.com.