…and the Fed is just getting started
This article first appeared on SchiffGold.
The Treasury added $111B in debt during March. Total Bills outstanding (short-term debt) actually shrunk by $126B. This is the biggest reduction since September of last year. As highlighted previously, the Treasury was actively reducing short-term debt for most of 2021. In 2020, Covid expenses were paid for by borrowing at the short end of the curve, dramatically reducing the average maturity of the debt and greatly increasing the risk of rising rates.
Note: Non-Marketable consists almost entirely of debt the government owes to itself (e.g., debt owed to Social Security or public retirement)
Figure 1: Month Over Month change in Debt
The next graph below shows the debt added per calendar year. This view more clearly highlights the effort in 2021 to reduce Bills outstanding.
Within the first three months of 2022, the Treasury has already added $784B in new debt. At this pace, the Treasury would issue $3.1T in new debt this year.
It’s unlikely the Treasury will stay at the current pace all year, and should be able to reduce net debt issuance. That being said, a looming recession (see yield curve inversion), higher interest rates, and a potential fall in tax receipts may wreak havoc later this year and next year.
Figure 2: Year Over Year change in Debt
Higher interest rates are already starting to be felt and the Fed barely has 25Bps under its belt. The chart below shows how annualizied debt interest has spiked quite rapidly since October. In October, annualized interest stood at $293B but has since risen by $16.4B to $309.5B.
Figure 3: Total Debt Outstanding
Figure 4: Weighted Averages
The Treasury is still maintaining a higher cash balance than pre-Covid levels. It may have tried to lock in lower interest rates while they were available (though current interest rates are still historically low).
Figure 5: 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:
Monthly Change in Debt with % Comparison | Trailing Twelve Month (TTM) Comparison | ||||||||||
Category | Current Balance | Mar 2022 | Feb 2022 | TTM Avg Monthly | MoM % Change | TTM % Change | TTM Ending | TTM Ending | TTM Ending | TTM | TTM |
Bills | |||||||||||
< 6 month | 2,900.1 | -138.3 | 86.1 | -51.3 | -260.6% | 169.6% | -615.6 | 1,574.5 | 195.2 | -139.1% | -415.4% |
6-12 months | 1,028.8 | 12.3 | 7.8 | -10.4 | 56.1% | -218.1% | -124.5 | 437.1 | -17.8 | -128.5% | 600.7% |
Notes | |||||||||||
1-3 years | 2,594.2 | 13.9 | 14.9 | 33.4 | -6.3% | -58.2% | 400.2 | 841.4 | 79.2 | -52.4% | 405.3% |
3-7 years | 5,436.4 | 40.4 | 27.5 | 53.6 | 47.3% | -24.5% | 642.9 | 664.4 | 84.4 | -3.2% | 662.1% |
7-10 years | 5,317.8 | 66.5 | 43.7 | 59.0 | 51.9% | 12.6% | 708.2 | -1.1 | 514.7 | -1,000.0% | 37.6% |
Bonds | |||||||||||
10-20 years | 594.0 | 19.0 | 22.3 | 25.9 | -14.7% | -26.6% | 310.3 | 283.7 | 9.4% | ||
20-years+ | 3,037.5 | 23.3 | 36.9 | 26.2 | -36.8% | -11.1% | 314.9 | 293.1 | 212.6 | 7.4% | 48.1% |
Other | |||||||||||
Nonmarketable | 7,114.8 | 20.5 | 0.9 | 30.9 | 1,000.0% | -33.7% | 370.4 | 220.4 | 435.1 | 68.0% | -14.9% |
Other | 2,377.2 | 53.0 | 37.9 | 21.8 | 40.0% | 143.3% | 261.7 | 132.2 | 155.7 | 97.9% | 68.0% |
Total | |||||||||||
Total | 30,400.8 | 110.6 | 278.0 | 189.0 | -60.2% | -41.5% | 2,268.5 | 4,445.7 | 1,659.1 | -49.0% | 36.7% |
Data as of: Mar 2022. % Changes are capped at 1,000%. | |||||||||||
As interest rates rise, the Treasury has to refinance existing debt at those higher rates. The chart below shows how much the Treasury has to rollover in the coming months (light green). In just the next three months, the Treasury will rollover $3.2T in debt. Most of that is short-term (Figure 6). This means that every increase in 25 Bps by the Fed will instantly increase annual interest payments by $8B. With the Fed promising to deliver multiple 50 Bps hikes, the Treasury could quickly see an increase of interest expense by almost $50B by year-end!
Figure 6: 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
The chart below better captures how short-term debt is rolling over in the months ahead. As shown, nearly all of it cycles through every 6 months.
Figure 7: Short Term Rollover
The Treasury would probably like to extend some of it’s debt (as it did in 2021), but that is 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 Notes because there wouldn’t be enough demand and interest rates would be pushed up. Factor in the Fed leaving the market, and the Bid to Cover will fall further, especially considering foreign governments are losing their appetite for Treasuries.
Figure 8: 2 year and 10 year bid to cover
Notes also don’t buy the Treasury that much extra time. While they have a longer maturity than Bills, it 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.
2022 will be the largest year ever in Notes that need to be rolled over at $2.4T. This will be quickly beat in 2023 as nearly $3T in Notes will rollover. Remember, this is debt that already exists and needs to be refinanced. It does not include new debt issuance nor does it include any Quantitative Tightening by the Fed.
Figure 9: Treasury Note Rollover
The Treasury is in trouble. The chart below shows the trajectory of interest rates since 2000. It has benefited greatly from a consistent reduction in rates over the last 20 years. The tide looks to have turned though, and interest rates are rising rapidly.
Figure 10: Interest Rates
In fact, short term rates are rising so fast, that the yield curve has started to invert, with short-term debt having higher rates than long-term. When the yield curve inverts a recession generally follows soon after.
Figure 11: Tracking Yield Curve Inversion
While total debt has now exceeded $30T, not all of it poses a risk to the Treasury. There is $7T+ 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. This debt poses zero risk because any interest paid is the government paying itself.
The remaining $23T is broken down into Bills (<1 year), Notes (1-10 years), Bonds (10+ years), and Other (e.g.,TIPS). The Fed owns $5.7T, which also poses zero risk because the Fed remits all interest payments back to the Treasury. In the chart below, this debt is actually counted as being “held by the Public”. Pretty soon it will be if the Fed starts quantitative tightening! Though it will take more than $95B a month to have any meaningful impact.
Figure 12: Total Debt Outstanding
The chart below shows how the reprieve offered by non-marketable securities has been fully used up. Pre-financial crisis, non-marketable debt was more than 50% of the total. That number has fallen below 25%.
Figure 13: Total Debt Outstanding
As shown above, recent years have seen a lot of changes to the structure of the debt, with risk being brought forward up the yield curve. Looking at a longer historical period shows an even more stark picture of how dramatic the changes have been. The table below explains why “the debt hasn’t been a problem for decades”, but refutes the notion that it can hold true going forward without significant and continued intervention by the Fed.
Category | # Years Ago | Bills | Notes | Bonds | Other | Total Mrkt | Nonmarketable |
Balance ($B) | 0 | 3,929 | 13,348 | 3,632 | 2,377 | 23,286 | 7,115 |
0.5 | 3,714 | 12,579 | 3,348 | 2,238 | 21,879 | 6,550 | |
1 | 4,669 | 11,597 | 3,006 | 2,116 | 21,388 | 6,744 | |
3 | 2,480 | 9,414 | 2,217 | 1,828 | 15,939 | 6,089 | |
20 | 834 | 1,443 | 597 | 161 | 3,035 | 2,971 | |
% of Total Balance | 0 | 12.9% | 43.9% | 11.9% | 7.8% | 76.5% | 23.4% |
0.5 | 13.1% | 44.2% | 11.8% | 7.9% | 77% | 23% | |
1 | 16.6% | 41.2% | 10.7% | 7.5% | 76% | 24% | |
3 | 11.3% | 42.7% | 10.1% | 8.3% | 72.4% | 27.6% | |
20 | 13.9% | 24% | 9.9% | 2.7% | 50.5% | 49.5% | |
Avg Interest Rate % | 0 | 0.24% | 1.35% | 2.96% | 0.53% | 1.33% | % |
0.5 | 0.06% | 1.39% | 3.09% | 0.55% | 1.34% | % | |
1 | 0.11% | 1.56% | 3.24% | 0.58% | 1.38% | % | |
3 | 2.41% | 2.08% | 3.97% | 0.67% | 2.23% | % | |
20 | 1.98% | 5.4% | 8.23% | 3.34% | 4.9% | % | |
Annualized Interest ($B) | 0 | 9.4 | 180.2 | 107.4 | 12.5 | 309.6 |
|
0.5 | 2.3 | 175.0 | 103.4 | 12.4 | 293.0 |
| |
1 | 5.0 | 180.5 | 97.4 | 12.2 | 295.2 |
| |
3 | 59.8 | 195.7 | 88.0 | 12.3 | 355.8 |
| |
20 | 16.5 | 77.9 | 49.1 | 5.4 | 148.8 |
| |
Avg Maturity (Yrs) | 0 | 0.22 | 3.51 | 21.83 | 5.82 | 6.05 |
|
0.5 | 0.22 | 3.50 | 21.80 | 5.94 | 5.99 |
| |
1 | 0.20 | 3.44 | 21.78 | 5.95 | 5.56 |
| |
3 | 0.22 | 3.30 | 21.57 | 6.42 | 5.72 |
| |
20 | 0.19 | 2.78 | 17.76 | 11.10 | 5.45 |
| |
Impact of .25% ($B) | 0 | 9.8 | 33.4 | 9.1 | 5.9 | 58.2 | 17.8 |
0.5 | 9.3 | 31.4 | 8.4 | 5.6 | 54.7 | 16.4 | |
1 | 11.7 | 29.0 | 7.5 | 5.3 | 53.5 | 16.9 | |
3 | 6.2 | 23.5 | 5.5 | 4.6 | 39.8 | 15.2 | |
20 | 2.1 | 3.6 | 1.5 | 0.4 | 7.6 | 7.4 | |
Bid to Cover Ratio | 0 | 3.11 | 2.55 | 2.58 | |||
0.5 | 3.66 | 2.4 | 2.42 | ||||
1 | 3.29 | 2.4 | 2.31 | ||||
3 | 2.89 | 2.79 | 2.25 | ||||
20 | |||||||
Data as of: Mar 2022 | |||||||
It can take time to digest all the data above. Below are some main takeaways:
The Fed is bluffing and the math is clear. Getting aggressive on interest rates will absolutely devastate the Federal Deficit. If the Fed has to actually fight inflation and raise rates to 3-4% the Treasury could quickly find itself in a debt spiral. Unfortunately, 3-4% isn’t nearly enough to bring inflation back down and is still historically low.
Add in a looming recession and it’s clear the runway is getting very short for the Treasury and the Fed. Either the Fed remains tough and the greatest depression in US history ensues, or the Fed caves and puts a lid on rates. This would exacerbate the inflation problem. The Fed is hoping inflation comes down on its own. Without a perfect scenario playing out, the Fed will have to choose between saving the dollar or trying to fight the greatest recession ever. Either situation should prompt investors to consider ways to protect themselves ahead of time using precious metals.
Data Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Data Updated: Monthly on fourth business day
Last Updated: Mar 2022
US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/