Why did they treasury allow debt to mature rather than using the limitless debt ceiling to increases cash positions?
This article first appeared on SchiffGold.
“Just because something is inevitable, does not make it imminent, but eventually the future arrives”
The US Government is on an unsustainable debt trajectory. Even though the Federal Reserve has acknowledged this fact, most mainstream figures consider it a distant problem or even not an issue at all. They argue that debt fears have raged since the debt crossed $1T decades ago and no negative consequences have materialized
This analysis shows why the US Government is at much greater risk than even a few years ago. It starts with a look at the recent numbers, then shows the debt rollover by product. A deeper look into history demonstrates the changing debt makeup that has created the increase risk for the Treasury.
In the month of July, the government shrunk the total outstanding debt by 102B. This is the only decrease in the debt outstanding over 18 months. It did continue the trend of rolling short term Bills into medium term Notes.
With the debt ceiling limit expiring on July 31, it is strange the Treasury would not use the last month of the suspended ceiling (and rock bottom interest rates) as a way to increase its cash reserve.
Non-Marketable consists almost entirely of debt the government owes to itself (e.g. debt owed to Social Security)
Figure 1: Month Over Month change in Debt
In fact, looking at the Treasury cash balance tells a very interesting story. In last years debt binge, the Treasury built up enormous cash reserves. Suddenly, and very rapidly, the Treasury decided to draw down its cash reserve by over $1T.
Was this a plan to put downward pressure on interest rates to help sell the narrative of transitory inflation? Is it a political move to ensure the US Debt Ceiling limit debate cannot be dragged out for months? One thing is for sure when looking at the chart below, the Treasury wanted to get rid of its cash cushion as fast as possible.
Currently the treasury is projected to run out of cash by Oct or Nov. Any logical person who recognizes the Treasury had no debt limit would ask: why not juice the balance sheet and get the new limit as high as possible? The answer is most likely that Yellen and Biden want a resolution to the debt ceiling debate sooner rather than later. The sooner the Treasury runs out of cash, the sooner congress has to deal with the problem.
Figure 2: Treasury Cash Balance
The table below looks at the most recent month of debt issuance, compared to the previous month, and also the Trailing Twelve Month (TTM) average. More history is shown on the right comparing the last 3 TTM periods (the last 36 months). Some key takeaways:
The points above and the data below show the Treasury replacing very short term debt (<1 year), with mostly medium term debt of 1-7 years. This does reduce the risk of rising interest rates some, but only for a short period. However, the Treasury seems to be moving away from this conversion in the coming months. It recently stated plans to reduce medium to long term debt issuance. Future funding crunches will be supported with short term debt issuance. Any increase in fiscal spending will immediately re-establish the short term debt risk that the Treasury has been strategically trying to reduce over the last year.
Monthly Change in Debt with % Comparison | Trailing Twelve Month (TTM) Comparison | ||||||||||
Category | Current Balance | Jul 2021 | Jun 2021 | TTM Avg Monthly | MoM % Change | TTM % Change | TTM Ending | TTM Ending | TTM Ending | TTM | TTM |
Bills | |||||||||||
< 6 month | 2,862.8 | -215.2 | -76.2 | -75.0 | 182.5% | 187.0% | -899.9 | 2,263.7 | 69.0 | -139.8% | -1,000.0% |
6-12 months | 1,279.3 | 82.3 | -25.8 | -3.1 | -418.9% | -1,000.0% | -37.0 | 609.3 | -69.0 | -106.1% | -46.4% |
Notes | |||||||||||
1-3 years | 2,345.3 | -33.1 | 54.3 | 66.0 | -161.0% | -150.2% | 792.4 | 332.7 | 0.8 | 138.2% | 1,000.0% |
3-7 years | 5,057.0 | 67.5 | 137.8 | 64.4 | -51.0% | 4.9% | 772.8 | 270.2 | 197.2 | 186.0% | 291.9% |
7-10 years | 4,782.7 | 44.3 | 83.9 | 16.0 | -47.3% | 176.3% | 192.2 | 182.5 | 349.3 | 5.3% | -45.0% |
Bonds | |||||||||||
10-20 years | 372.1 | 0.0 | 59.9 | 26.0 | -100.0% | -100.0% | 311.8 | 60.4 | 416.6% | ||
20-years+ | 2,835.7 | 28.0 | 26.2 | 26.9 | 6.7% | 3.8% | 323.1 | 222.0 | 198.2 | 45.6% | 63.0% |
Other | |||||||||||
Nonmarketable | 6,729.2 | -61.2 | 12.7 | 17.7 | -581.0% | -446.4% | 212.1 | 462.9 | -173.5 | -54.2% | -222.2% |
Other | 2,163.6 | -14.1 | 57.6 | 19.6 | -124.6% | -172.2% | 235.2 | 98.9 | 137.4 | 137.7% | 71.2% |
Total | |||||||||||
Total | 28,427.7 | -101.5 | 330.4 | 158.6 | -130.7% | -164.0% | 1,902.7 | 4,502.6 | 709.4 | -57.7% | 168.2% |
Data as of: Jul 2021. % Changes are capped at 1,000%. | |||||||||||
While it may help that 23% of total US debt is owed to itself (Non Marketable), it still leaves a massive $22T to wrestle with. Another point of relief is the $5T held by the fed, which is an interest free loan (more on this below). Even with the $11T in interest free loans, the primary risk the government faces is not new debt issuance (it could just cut spending), but instead rolling over existing debt.
Rolling over debt is using new debt to pay back debt that is maturing. The chart below shows the amount of debt issued and matured going back 7 years. It also looks forward to see what is maturing in the future. As shown below, the majority of debt issued each month is actually rollover, with only a small percentage being new debt (red bar), which can even bring total debt down when more matures than is issued (on occasion such as this past month).
Figure 3: Monthly Rollover
Note “Net Change in Debt” is the difference between Debt Issued and Debt Matured. This means when positive it is part of Debt Issued and when negative it represents Debt Matured
From 2012-2016 about $500B a month was rolling over (mostly short term as explained below). This started moving up in 2017, reaching $1T a month by 2020 before jumping to $1.5T as Covid hit. Another important factor is the red bar showing how much of the Issued debt is new debt, being added.
While it may look like the government is about to get relief with a lot of debt maturing in the coming months, most of the debt will be refinanced into short term debt and the rolling will continue at above $1.5T.
There is currently $4T outstanding in short term treasury bills, up more than double the amount 3 years ago. The Treasury tends to finance surges in spending with Treasury Bills because they are well accepted by the market. The plot below shows the Bid to Cover ratio for short term T-Bills. A higher Bid-to-Cover indicates stronger demand. While demand is off from its peak during 2012-2015, a bid-to-cover above three is still strong. Especially considering how much more short term debt has been issued in recent years.
Figure 4: T-Bill Bid to Cover
While demand for T-Bills may be strong, it poses a risk to the Treasury. Each month almost 35% (1.5T) is rolling over, and as the chart below shows nearly 100% rolls over within a six-month window. This means any Fed hike will be felt almost instantly in the Treasury Bill market. Each .25% rate hike will translate to $10B a month in additional annual interest payments within 6 months.
As discussed above, the Treasury is making an effort to convert some of the Treasury Bills into Notes. If this effort is successful, the short term risk will decreases some; however, it may prove more challenging to restructure most of its short term debt, especially with all the new spending planned. Even if successful, it’s mostly rolling into 1-7 year debt which only provides some short term relief.
Figure 5: Short Term Rollover
Although the Treasury talks about taking advantage of low interest rates to lock in expenses, it’s easier said than done. The plot below shows the bid to cover for 2 year and 10 year debt. Unlike Bills which range between 3-3.5, Notes are closer to 2.5. The Treasury cannot flood the market with new debt because there wouldn’t be enough demand and interest rates would be pushed up.
Figure 6: 2 year and 10 year bid to cover
Notes also present their own problem. While rates do get locked in, the Treasury really only buys relief for a couple years. The chart below shows the annual rollover for Treasury Notes. As shown, the amount rolling over has picked up significantly in recent years even though net change in debt is still below the levels in 2008 and 2009.
2022 will be the largest year ever in Notes that need to be rolled over. This is just showing debt that already exists and needs to be refinanced. What also needs to be considered is the new spending and also the efforts to convert T-Bills into Notes as mentioned above.
Furthermore, the last red bar represents 2021 new debt through June. While the debt ceiling will halt new debt for the next few months, when the ceiling is raised, total Note issuance for 2021 could approach $4T (the light green bar of $1T+ still needs refinancing in 2021)! It will be important to watch this chart in the coming months to see how the Treasury handles Note issuance, especially with the debt ceiling coming into play.
Figure 7: Treasury Note Rollover
Finally, a look at interest rates shows how the Treasury has been able to maintain low interest payments despite a ballooning deficit. Rates have been declining for 20 years. The actions by the Fed to hold short term rates at 0% and also engage in Quantitative Easing have been critical for the Treasury to manage its debt load. Unfortunately, rates have come up against a floor at zero, so there may not be much room for either the Fed or Treasury to maneuver.
This is why the Fed cannot raise rates or even taper QE without significant ramifications.
Figure 8: Interest Rates
Recently, the 10 year and 2 year rates have started moving back together. While there is still distance before the yields invert (as shown below), it is a trend to watch. Perhaps driving this convergence is the debt issuance by the Treasury over the last few months, focusing Note issuance at the shorter range rather (1-7yr) than the longer end (7-10yr) as shown in the tables above.
Figure 9: Tracking Yield Curve Inversion
The loudest critics of the US Debt and Fed monetary policy will point to $28.5T in US Debt and quickly calculate that every .25% interest rate move costs the US $70B a year. The debt is a major problem, but the real story is much more complicated. It’s important to understand the makeup of the debt, maturity schedules, and current interest rates. To start, the chart below breaks down how the debt is organized by instrument.
There is $6T+ of Non-Marketable securities which are debt instruments that cannot be resold. The vast majority of Non-Marketable is money the government owes to itself. For example, Social Security holds over $2.8T in US Non-Marketable debt, almost half the total amount. This debt poses zero risk because any interest paid is the government paying itself.
The remaining $22T is broken down into Bills (<1 year), Notes (1-10 years), Bonds (10+ years), and Other (e.g. TIPS).
Figure 10: Total Debt Outstanding
The chart below shows how the distribution of debt has changed and what the impact has been on total interest. The amount of Non-Marketable as a percentage of total has shrunk significantly from 50% down below 25%. The spike in short term debt can also be seen in the last two recessions as the government used T-Bills to finance surges in spending.
Figure 11: Total Debt Outstanding
Recent years have seen a lot of changes to the structure of the debt, with risk being brought forward up the yield curve as shown in the chart above. Looking at a longer historical period shows an even more stark picture of how dramatic the changes have been. This table explains why “it hasn’t been a problem for decades”, but refutes the notion that it can hold true going forward without significant and continued intervention by the Fed.
Category | # Years Ago | Bills | Notes | Bonds | Other | Nonmarketable |
Balance ($B) | 0 | 4,142 | 12,185 | 3,208 | 2,164 | 6,729 |
0.5 | 4,955 | 11,173 | 2,866 | 2,056 | 6,736 | |
1 | 5,079 | 10,428 | 2,573 | 1,928 | 6,517 | |
3 | 2,206 | 9,095 | 2,092 | 1,692 | 6,228 | |
20 | 653 | 1,437 | 613 | 150 | 2,865 | |
% of Total Balance | 0 | 14.6% | 42.9% | 11.3% | 7.6% | 23.7% |
0.5 | 17.8% | 40.2% | 10.3% | 7.4% | 24.2% | |
1 | 19.1% | 39.3% | 9.7% | 7.3% | 24.6% | |
3 | 10.3% | 42.7% | 9.8% | 7.9% | 29.2% | |
20 | 11.4% | 25.1% | 10.7% | 2.6% | 50.1% | |
Avg Interest Rate % | 0 | 0.06% | 1.46% | 3.16% | 0.57% | % |
0.5 | 0.17% | 1.66% | 3.33% | 0.59% | % | |
1 | 0.62% | 1.89% | 3.61% | 0.64% | % | |
3 | 1.79% | 1.93% | 4.07% | 0.71% | % | |
20 | 4.24% | 5.93% | 8.32% | 3.34% | % | |
Annualized Interest ($B) | 0 | 2.6 | 177.5 | 101.3 | 12.3 |
|
0.5 | 8.6 | 185.6 | 95.5 | 12.2 |
| |
1 | 31.5 | 197.2 | 92.8 | 12.3 |
| |
3 | 39.5 | 175.5 | 85.2 | 12.0 |
| |
20 | 27.7 | 85.2 | 51.0 | 5.0 |
| |
Avg Maturity (Yrs) | 0 | 0.21 | 3.42 | 21.79 | 5.95 |
|
0.5 | 0.21 | 3.34 | 21.75 | 5.97 |
| |
1 | 0.22 | 3.33 | 21.68 | 6.26 |
| |
3 | 0.23 | 3.36 | 21.47 | 6.86 |
| |
20 | 0.22 | 2.76 | 18.07 | 11.12 |
| |
Impact of .25% ($B) | 0 | 10.4 | 30.5 | 8.0 | 5.4 | 16.8 |
0.5 | 12.4 | 27.9 | 7.2 | 5.1 | 16.8 | |
1 | 12.7 | 26.1 | 6.4 | 4.8 | 16.3 | |
3 | 5.5 | 22.7 | 5.2 | 4.2 | 15.6 | |
20 | 1.6 | 3.6 | 1.5 | 0.4 | 7.2 | |
Bid to Cover Ratio | 0 | 3.62 | 2.41 | 2.19 | ||
0.5 | 3.4 | 2.52 | 2.47 | |||
1 | 3.1 | 2.49 | 2.47 | |||
3 | 2.84 | 2.61 | 2.34 | |||
20 | ||||||
Data as of: Jul 2021 | ||||||
It can take time to digest all the data above. Below are some main takeaways:
The Treasury is out of tricks. Interest rates have bottomed and the intra-government debt cannot keep up with debt issuance (not to mention at some point those bills will come due also - e.g. Social Security). While an increase in interest rates would take time to work its way through Notes and Bonds, the impact would be felt immediately in Bills. That being said, with Notes having an avg maturity of 3.5 years, it wouldn’t take long to feel the increase in Notes as well which would prove devastating given the balance size.
Thus the Fed cannot raise short term rates and it needs to keep long term rates contained. Given the amount of Notes to rollover in the years ahead, any effort to taper will be “transitory” at best. With the Fed forced to continue aggressive monetary policy indefinitely, it is almost certain inflation will prove much more persistent than the Fed is leading on. Other countries do not have the same risk/exposure as the Treasury which means the dollar could come under significant pressure as the Fed is unable to act to combat inflation while foreign central banks do. Gold and silver offer a great protection against a devaluing dollar in this environment.
Not only does the Fed alleviate pressure on the Treasury by keeping interest rates low across the curve, but the debt the Fed buys equates to an interest free loan. Any interest the Fed receives from its balance sheet is returned to the Treasury. “Only” $5.2 of the $8T balance sheet is in Treasuries, but it is almost all in Notes. While this does offer medium term protection, the Treasury is still exposed to short term rates. Furthermore, it also means the Fed will be unable to shrink its balance sheet or the medium term protection will be immediately lost. This should be considered when reviewing the information above and the impact of rising rates.
Data Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Data Updated: Monthly on fourth business day
Last Updated: Jul 2021
US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/