Treasury Binges in October, Adding Almost Half a Trillion in Debt
After all the drama, the government finally did what everyone knew would happen… and raised the debt ceiling. The Treasury wasted no time and added $480B in the second half of October.
With this new debt tagged on, if the Fed has to raise rates to 6% to fight inflation, it would increase interest costs by $250B within 6 months and nearly $1T within a few years. This is why the Fed must tell everyone that inflation is transitory!
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
Where did the new money go?
The first order of business was replenishing the Government Retirement accounts which are shamelessly raided every time the Treasury resorts to extraordinary measures. This can be seen in the two light green bars above in August and October.
The second thing the Treasury did was replenish its depleted cash balance as shown below. On Oct 14, the Cash balance was as low as $46.5B and has since bounced back to $311B. This was the lowest cash balance the Treasury had since it reached $32B in Sept 2017.
Figure: 2 Treasury Cash Balance
Detailed Debt Breakdown
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 Treasury added debt across almost all instruments except 1-3 year Notes and 20-year bonds
- Debt issuance was concentrated heavily in short-term Bills.
- This is typical as the Treasury will raise large cash amounts in short term bills which are well received by the market
- This debt is then slowly converted into long term debt as it has been doing earlier this year
- This can be seen in the activity during September which saw <6 Month Bills shrink $340B and replaced by debt issued across the curve
- Looking at TTM values:
- The Total T-Bill outstanding has fallen by $1T in the past year
- Issuance of notes has skyrocketed, but primarily in 1-7 years:
- 1-3 year increased from $487B to $714B
- 3-7 year more than tripled from $284B to $890B
- 7-10 year nearly tripled from $122B to $312B
- In aggregate, 1-7 year added $1.6T vs $1T for 7-30 Year
- This highlights the Treasuries inability to really lock in long term rates
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 slightly reduce the risk of rising interest rates, 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.
Figure: 3 Recent Debt Breakdown
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 $5.4T held by the fed, which is an interest-free loan. Even with the combined $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 the 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.
In November, the Treasury will rollover $1.42T. This is below the record $1.75T rolled over in July 2020, but it will only take another debt binge to break this record. Before Covid, the Treasury was rolling over just under $1T a month, so it is still 50% above this figure. And that’s after the Treasury spent the year reducing short-term debt as quickly as possible.
Figure: 4 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
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 well above $1T.
T-Bills (< 1 year)
While demand for T-Bills may be well received by the market, it poses a risk to the Treasury. Each month almost 31% ($1.2T) 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 $9.6B 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 decrease 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
Treasury Notes (1-10 years)
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 of 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, currently at $2.5T. 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.
So far through October, total new Note creation has reached $1.63T, breaking the $1.4T record from 2010. Total note issuance passed $3T in 2020! With the Fed taper, who is going to absorb all that debt without pushing interest rates up?
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.
Figure: 8 Interest Rates
Recently, rates have started moving up. The 2-year is rising faster than the 10-year which has resulted in a slight fall in the yield curve as shown below.
Figure: 9 Tracking Yield Curve Inversion
The loudest critics of the US Debt and Fed monetary policy will point to $28.9T 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.
Short Term Bills moved back down as discussed above, but this has also meant that relief in interest payments has stopped as the Treasury loses the benefit of 0% interest rates. The black line has now been flat for the past 8 months. It would only take a rise of short-term rates to 1.25% for annualized interest to reach a new record.
Figure: 11 Total Debt Outstanding
Historical Debt Issuance Analysis
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. The table below 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.
Figure: 12 Debt Details over 20 years
It can take time to digest all the data above. Below are some main takeaways:
- Bills have increased from $736B to $3.8T over 20 years yet Annualized interest has fallen from $25.8B to $2.3B
- The impact of a .25% interest rate hike is up 5x from $1.8B to $9.6B
- As recently as 3 years ago, annual interest on Bills was $46.3B, despite almost half the current size. Rates only reached 1.7%.
- Returning to 5% on Bills would cost the Government $192B a year!
- Bills still make up 13.3% of the debt, up from 10.4% three years ago
- Notes made up 24.4% of total debt balance 20 years ago but have surged to 43.7%
- 20 years ago 50% of debt was Nonmarketable (owed to itself – posing no risk), but that well has seemingly gone dry. Nonmarketable is not even 25% of total debt outstanding
- Notes increased nearly 10 fold $1.4T to $12.6T, yet interest has only doubled $81.6B to $174.8B
- If avg interest rate returned to 5.75% (up from today’s 1.46%), total annualized interest would clock in at $727B!
- Bond balances are also up 6x while interest is only up double ($51B vs $103B)
- Avg maturity has been extended some increasing from 2.8 yrs to 3.4 in Notes and from 18 yrs to 21.8 in Bonds
What it means for Gold and Silver
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 especially if the Fed had a prolonged fight against inflation.
Thus the Fed cannot raise short-term rates and it needs to keep long-term rates contained. If the Fed had to hike rates above inflation to 6%, this would utterly devastate the Treasury’s ability to manage its debt load. Interest on Bills would increase by $240B in 6 months. Annualized interest on Notes could surge more than $600B within a few years.
Bottom line: if the Fed has to fight inflation it will cost the Government almost $1T a year in interest. Not to mention all of Biden’s new spending. This is all on top of the current $1T budget deficits. Where is the Treasury going to raise $2T if the Fed is busy fighting inflation?
The Fed won’t pick a fight it can’t win, so it’s going to let inflation go and rescue the Treasury. When the market figures this out, gold and silver will move significantly higher and the 5% inflation of today will be considered low inflation.
Data Updated: Monthly on the fourth business day
Last Updated: Oct 2021
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