The Treasury increased total debt by $27 billion in June. Activity has slowed over the past month across all instruments, but particularly the conversion from short to long term. After massive moves to extend debt maturity and reduce short-term debt by $530 billion over 4 months (shown below by the large negative turquoise bars), July was very quiet.
Note: Non-negotiables consist almost entirely of debt the government owes itself (e.g. debt to social security or public pension)
Figure: Month-on-month change in debt
Despite the recent slowdown in debt issuance, the Treasury added more than $1 billion in debt in the first 7 months of the year. The current debt ceiling is $31.4 billion, leaving the Treasury about $800 billion before it has to pursue “extraordinary measures.”
Figure: Change in debt over 2 years
The recent conversion of short-term debt to long-term debt can be seen below as the Treasury extended the average maturity of debt to record highs. The current average maturity is 6.16 years, down from 5.76 just before Covid hit.
Unfortunately, that hasn’t stopped debt interest from climbing. The Fed’s hike cycle took the weighted average interest rate from 1.3% to 1.53%. 23bps may not seem like much, but on a balance of $30.6 billion, that amounts to $70 billion!
Figure: 3 weighted averages
The chart below shows the impact of rising interest rates. Interest on marketable debt returned to the old all-time high of $360 billion in a very short time. The rate of increase is even more worrying. Interest has increased by 22% or 65 billion dollars in 7 months!
The black line shows interest as calculated by the federal budget due next week (below through June). This will include other interest charges beyond negotiable debt, such as the new I-Bondswhich distributes interest above 9%!
Figure: 4 Net interest expense
The graph below shows how the popularity of I-Bonds has exploded since November of last year. The total balance of I-Bonds has increased by more than 50% in 8 months. A guaranteed 9% return on investment is an incredible investment in these uncertain times. The balance would be much higher if it were not capped at $10,000 per year per social security number.
Note: I Bonds are non-marketable debt but are held by the public
Figure: 5 Bonds I
Dig into debt
The table below summarizes the total outstanding debt. Some takeaways:
On a monthly basis:
- July emissions were 85% lower than the TTM average
- New debt was still concentrated on the long end of the curve, with 7-10 years and 20+ years seeing the most additions
- Bills saw a modest net reduction of $9 billion
On a TTM basis:
- Debt increased by $2.1T, which is actually higher than the $1.9T added in July 2021, but well below the $4.5T added in July 2020
- Even the balance in Notes has been targeted for expansion
- 1-3 year and 3-7 year issues are down 55% and 46.5% respectively, while 7-10 year issues have increased by 251%!
Figure: 6 Recent Debt Breakdown
As noted above, annualized interest on debt has surged in recent months. This will only continue as the Treasury is forced to refinance large amounts of debt in the coming months at much higher rates, as shown below.
Figure: 7 Monthly turnover
Note “Net change in debt” is the difference between debt issued and debt due. This means that when positive it is part of issued debt and when negative it represents matured debt.
Treasury bills (
The majority of the monthly turnover occurs in treasury bills. The Fed’s latest 75 basis point hike hasn’t even started to trickle down to bills. The June hike only made its way to about 25% of bills in circulation. That means 150 bps has yet to work its way through most of the $3.5 billion bill balance. Based on the schedule below, interest on the bonds alone will increase by $45 billion by December, not including further rate hikes.
Figure: 8 Short Term Rollover
Treasury Notes (1-10 years)
Despite the lengthening of the maturity, the Treasury is not so well protected against a rapid rise in short-term rates. The bills pose the greatest risk, but the notes are relatively short-term with an average maturity of 3.44 years and represent 44.6% of the $30,000 balance. The rolling schedule can be viewed below. $4,000,000 should be rolled over by December 2023!
Figure: 9 Treasury bill rollover
The yield curve
One advantage for the Treasury right now is the inverted yield curve. The cost of issuing longer-term debt is actually cheaper than issuing shorter-term debt. Although an inverted yield curve is usually a sign of an impending recession, it creates a windfall for the Treasury. They extend the term of their debt and save money! The yield curve is the most inverted since the early 2000s. This would help explain some of the recent activity that the Fed has taken advantage of by buying long-term notes.
Figure: 10 Yield Curve Inversion Tracking
Although the total debt has now exceeded $30,000,000, not all of it poses a risk to the Treasury. There are over $7 billion in non-marketable securities that are debt securities that cannot be resold. The vast majority of non-negotiables are money the government owes itself (not including I-Bonds). For example, Social Security holds over $2.8 trillion in nonmarketable US debt. This debt is risk free because all interest paid is the government itself. The risk will be when Social Security has to start selling that debt.
The remaining $23,000,000 is split into bills (
Figure: 11 Total outstanding debt
The chart below shows how the reprieve offered by non-marketable securities has been fully utilized. Before the financial crisis, non-marketable debt accounted for more than 50% of the total. This number fell to 23.7%. In recent months, the Treasury has increased issuance of non-negotiables, but this has not been enough to make up for lost ground.
Figure: 12 Total outstanding debt
Historical analysis of debt issuances
As noted above, recent years have seen a lot of changes in debt structure. Even if the Treasury has extended the maturity of the debt, it no longer benefits from the free debt in non-negotiable securities. Also, the debt is so large that even though the short-term debt has decreased as a % of the total, it is still a massive aggregate number ($3.5T).
Figure: 13 Debt details over 20 years
It may take some time to digest all of the above data. Here are some main takeaways:
- Annualized interest increased from $302 billion to $365 billion in 6 months
- Over the same period, the average maturity increased from 6 to 6.17 years
- In 20 years, non-negotiable debt went from $3,000,000 to $7.2,000,000 but decreased in percentage from 50% to 24%
- Debt is growing too fast for Non-Negotiable to keep up with
- Each “oversized” rate hike of 0.75% increases the annualized debt on the following instruments by the amount shown below. Keep in mind that it takes time to work your way through longer-term maturities like notes and bonds.
- Bills: $26.4 billion
- Notes: $102.3 billion
- Bonds: $28.5 billion
- Annualized interest increased from $302 billion to $365 billion in 6 months
What this means for gold and silver
While the market continues to see the current Fed as being “tough on inflation”, Powell is far from Volker, with real interest rates still very negative. While negative real rates won’t do much to combat runaway inflation, they will do a lot to upset anyone who’s sitting with lots of short-term or resettable-rate debt. Look no further than the US Treasury for the most at risk.
A strong jobs report in July gave the Fed more leeway to deny the recession and undertake another aggressive rate hike in September. The Fed is moving very quickly and the math is just starting to catch up. The Treasury could quickly find itself paying more than $500 billion in annual interest payments. Then what ? What if inflation was still high? Can the Fed continue to climb and send the US government into a spiral of debt while destroying the value of its own balance sheet?
That seems unlikely at best. The Fed must pivot because it must mathematically! This is the same reason why interest rates are not above the rate of inflation today. They can’t be! The US Treasury, along with all other overburdened borrowers, would go bankrupt. The Fed will not let that happen.
The data source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Data updated: monthly on the fourth working day
Last update: July 2022
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