A big fear among investors and people running actual businesses in the U.S. is that at some point, interest rates must rise from historic lows.  This must happen, in part, because nothing lasts forever.  But behind that truism, there is a lot that could cause rates to rise.

By rates here we mean the rate of interest paid on an oustanding piece of 10-year Treasury debt.  That rate is a function of the bond's market price and the coupon paid at issue.  If you buy the bond when it was issued, you pay par and you get the promised coupon (let's say it's 2 percent).  If your friend has that bond and really needs the money and you buy it from them at 50 cents on the dollar, what was a 2% coupon to him is a 4% interest rate to you.  He loaned the Treasury $100 at 2% interest.  You basically loaned the Treasury $50, but at 2% interest on $100.  Apologies if this is too rudimentary but it's important to get out of the way.  A lot of very smart people (*raises hand*) do no understand how bonds work and yet the basics are often not included when people talk about them.  Anyway, the very basic example above is what we mean by "rising rates."

The 10 year Treasury is a benchmark for other types of loans because it is considered "risk free," because the U.S. will never not pay its debts.  Let's say that Doc Cleveland, Michael Wolraich, Ramona and the U.S. Treasury all want to borrow your money.  The Treasury says it will pay you 2% and that there is not way ever that you will not get a promised interest payment or get your money back when it is due.  If the Treasury will pay you 2%, what do Cleveland, Ramona and Wolraich have to pay you?  Trick question.  The answer is 2%.  Because these are 4 institutions that will never let you down.  If the NRA wants to borrow money, though, the answer is a million percent because they the NRA will borrow your money and then spend it all on guns and when you ask for them to pay you back as promised, they will shoot you.

Things become complicated if people stop believing that the Treasury is as trustworthy as Doc, Michael and Mona.  If people in Congress, with the power to muck up the works, keep edging the government toward default then people are going to eventually start questioning the Treasury's promises.  That means the Treasury looks a lot more like the NRA.  Except that the Treasury has the Pentagon so if it decides, for some reason, not to pay you back, you really have no defense against a Cruz missile.  That means that people will pay less and less for Treasury bonds and, as we saw above, the less you pay for a bond, the higher its interest rate.  The cost of borrowing skyrockets.  Pretty soon, the budget is either all going towards interest payments or there is a real default.

The good news is that Democrats are putting a stop to it by challenging far right and Tea Party candidates to make pledges not to shut down the government or allow the debt ceiling to be breached.  If Democrats can force this issue and get the radical right on record before their candidates are even elected, well... that solves a big part of the Treasury bill confidence problem right there.  If that problem is solved then Treasury prices can stay high and that means rates can stay low.  That keeps the federal budget out of jeopardy.  If Democrats can stoke a bond bull market on the campaign trail, that could be a significant and I'll bet overlooked, event in the contemporary economy.