Treasury increased total debt by $27 billion in June. Activity has slowed across all instruments over the last month, but particularly in the switch from short-term to long-term. After massive measures to extend debt maturity and reduce short-term debt by $530 billion over 4 months (represented by the large negative cyan bars below) July was very quiet.
Note: Non-marketable debt consists almost entirely of debt that the government owes itself (e.g. debt to Social Security or public pensions).
Despite the recent slowdown in debt issuance, the Treasury added more than $1 trillion in debt in the first 7 months of the year. The current debt ceiling is $31.4 trillion, which leaves the Treasury about $800 billion before it has to take “extraordinary measures.”
The recent swapping of short-term debt into long-term debt can be seen below as the Treasury has extended the average life of debt to record highs. The current average maturity is 6.16 years, up from 5.76 years just before the Covid outbreak.
Unfortunately, that hasn’t stopped interest rates on the debt from skyrocketing. The Fed’s rate hike cycle has pushed the weighted average rate up from 1.3% to 1.53%. 23 bps might not sound like a lot, but with a balance of $30.6 trillion, that’s $70 billion!
The chart below shows the impact of higher interest rates. Interest rates on marketable debt have returned to the all-time high of $360 billion in a very short space of time. Even more worrying is the pace of the increase. Interest is up 22% or $65 billion in 7 months!
The black line shows the federal budget-calculated interest due next week (bottom through June). This includes other interest charges beyond marketable debt, like the newly popular I-Bonds, which are paying interest in excess of 9%!
The chart below shows how the popularity of I-Bonds has exploded since November of last year. Total I-Bonds balance increased by more than 50% in 8 months. A guaranteed 9% ROI is an incredible investment in these uncertain times. The credit would be much higher if it weren’t capped at $10,000 per social security number per year.
Note: I-Bonds fall under non-marketable debt but are held by the public
digging into debt
The table below summarizes the total outstanding debt. A few core statements:
- July output was 85% below the TTM average
- New borrowing was still concentrated at the long end of the curve, with 7-10 years and 20+ seeing the most additions
- Bills saw a modest net reduction of $9 billion
On TTM basis:
- Debt has increased by $2.1 trillion, which is actually greater than the $1.9 trillion added in July 2021 but well below the $4.5 trillion added in July 2020
- Even the balance within Notes has been targeted for expansion
- Emissions from 1-3 year olds and 3-7 year olds have decreased by 55% and 46.5% respectively, while emissions from 7-10 year olds have increased by 251%!
As shown above, annualized interest rates on the debt have risen sharply in recent months. This will only continue as the Treasury is forced to roll over significant amounts of debt at much higher interest rates in the coming months, as shown below.
Note “Net change in debt” is the difference between debt issued and debt due. This means if it is positive it is part of Debt Issued and if negative it stands for Debt Due
T-bills (< 1 year)
The bulk of the monthly rollover is in Treasury bills. The Fed’s recent 75 basis point hike hasn’t even started to propagate through bills. The June hike only went through about 25% of the outstanding bills. That means 150bps still has to work its way through most of the $3.5 trillion balance. Based on the schedule below, interest rates on bills alone will rise by $45 billion by December, not including further rate hikes.
Treasury Notes (1-10 Years)
Despite the extended maturity, the Treasury is not well protected from a rapid rise in short-term interest rates. Bills of exchange pose the greatest risk, but debt securities are relatively short-term, with an average maturity of 3.44 years, and account for 44.6% of the $30 trillion balance. The rollover schedule can be viewed below. $4T to circulate by December 2023!
The Yield Curve
One advantage for the Treasury at the moment is the inversion of the yield curve. The cost of issuing longer-dated debt is actually cheaper than issuing shorter-dated debt. While an inverted yield curve is generally a sign of an imminent recession, it creates a windfall for the Treasury. You can extend the life of your debt and save money! The yield curve is the most inverted since the early 2000s. This would help explain some of the recent activity where the Fed is taking advantage by buying long-end debt.
Although total debt has now surpassed $30 trillion, not all of this poses a risk to the Treasury. There are $7T+ in non-marketable securities, which are debt securities that cannot be resold. The vast majority of non-marketable funds are funds that the government owes itself (excluding I-Bonds). For example, Social Security holds over $2.8 trillion in non-marketable US debt. This debt does not pose a risk as all interest paid is paid by the state itself. The risk is that Social Security will have to start selling that debt.
The remaining $23 trillion is broken down into bills (<1 year), notes (1-10 years), bonds (10+ years) and other (e.g. TIPS). The Fed owns $5.7 trillion, which is also not at risk since the Fed remits all interest payments back to the Treasury. The Fed has promised to start selling these debt instruments, but QT is starting very slowly.
The chart below shows how the grace period afforded by non-marketable securities has been completely consumed. Before the financial crisis, non-marketable debt accounted for more than 50% of the total. That number has dropped to 23.7%. In recent months, the Treasury has increased issuance of non-marketable paper, but that’s not enough to make up lost ground.
Historical debt issuance analysis
As shown above, the structure of debt has changed significantly in recent years. Although the Treasury has extended the maturity of the debt, it no longer benefits from the free debt in non-marketable securities. In addition, the level of debt is so large that while short-term debt has shrunk as a percentage of the total, it is still an enormous sum ($3.5 trillion).
It may take some time to process all of the above data. Below are some key takeaways:
- Annualized interest rates have increased from $302 billion to $365 billion in 6 months
- During the same period, the average term increased from 6 to 6.17 years
- Over 20 years, non-marketable debt has increased from $3 trillion to $7.2 trillion but has fallen from 50% to 24% as a percentage.
- The debt is growing too fast for non-marketables to keep up
- Each “overstated” 0.75% rate hike increases the annualized leverage of the following instruments by the amount shown below. Keep in mind that it takes time to work your way through the longer-dated maturities, such as debentures and bonds.
- Bills: $26.4 billion
- Notes: $102.3 billion
- Bonds: $28.5 billion
What it means for gold and silver
While the market continues to view the current Fed as “tough on inflation,” Powell is a far cry from Volcker as real interest rates are still very negative. While negative real interest rates will do little to combat raging inflation, they will do a lot to turn down anyone with a lot of short-term or adjustable-rate debt. Look no further than the US Treasury Department for the largest vulnerable party.
A strong jobs report in July gave the Fed more leeway to deny a recession and launch another aggressive rate hike in September. The Fed is moving very fast and the math is just starting to catch up. The Treasury could quickly pay more than $500 billion in annual interest payments. So what? What if inflation is still high? Can the Fed continue to wander and send the US government into a debt spiral while destroying the value of its own balance sheet?
This seems unlikely at best. The Fed needs to pivot because the math has to! This is the same reason why interest rates are not Above the inflation rate today. They can’t! The US Treasury would buckle along with any other overstretched borrower. The Fed will not allow that.
Data source: Monthly Statement of the Public Debt (MSPD) and downloadable files
Data update: Monthly on the fourth business day
Last update: July 2022
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.