Treasury braces for another debt ceiling saga

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The Treasury added $309 billion in new debt in October, of which $260 billion was nonmarketable debt. Non-marketable debt was concentrated in the Medical Insurance Trust Fund ($166 billion), the DoD Retirement Fund ($26 billion), the Emergency Child Enrollment Fund ($18 billion ) and the federal hospital insurance trust fund ($14 billion).

The increase in non-marketable debt is likely in preparation for the debt ceiling debate. The Treasury did the same last October, increasing non-marketable debt by $226 billion.

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

Year-to-date, the Treasury has added $1.6 billion in new debt in 2022 despite record tax revenue. Before Covid only 2010 had higher debt issuance and that was for the whole calendar year. With two months left in 2022 and $200 billion before hitting the debt ceiling, there is no doubt that this year would have set a record before the Covid debt madness.

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 debt maturity to record highs. The current average maturity has stabilized around 6.2 years against 5.8 years before Covid.

Despite the long maturity of the debt, the weighted average interest on debt continues to climb rapidly, rising 10 basis points in the last month alone, from 1.72% to 1.82%, and 18 basis points basic from August.

Figure: 3 weighted averages

The Treasury must know that the pivot of the Fed will come, otherwise its debt becomes completely unsustainable!

The chart below shows the increase in interest cost so far, but it also calculates the impact on interest cost if the Fed sticks to its current plan. The chart models interest rates at 4.5% by the end of the year, rising to 5.5% next September, then slowly coming down again in 2025.

The impact of rising rates is already being felt, but it will worsen considerably in the months to come. The chart below estimates interest above $750 billion by December next year and approaching $1 billion by the end of 2025.

Note: For simplicity, it assumes the same (conservative) interest rate level for all securities. It also only takes marketable debt into account and assumes $1 billion a year of new debt.

Figure: 4 Projected net interest expense

The chart above only shows interest on marketable debt. The distribution of interest between the types of securities is illustrated below. The black line covers TTM’s actual federal interest charges as shown on the Federal deficit. The black line also includes non-negotiable interests.

Figure: 5 Net interest expense

The reason annualized interest will increase so much is due to debt that needs to be rolled over in the coming months. The chart below shows the amount of debt that rolls over (~$1,000,000 per month). Much of it is short-term debt, hence the sharp decline in the light green bars, but every time the Fed raises rates, the impact on the Treasury is almost immediate.

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.

Dig into debt

The table below summarizes the total outstanding debt. Some takeaways:

On a monthly basis:

    • All instruments increased except for a $58 billion decline in 3-7 year maturities
    • Bills edged up $21.4 billion versus a 12-month average of -$15.5 billion

On a TTM basis:

    • 6-12 month maturities fell $229 billion during the year, with total bills down $186 billion
        • This is down significantly from the TTM in October 2021, when Treasuries fell by $1.13 billion.
    • Over the past 12 months, total debt has increased by $2.3 billion

Figure: 8 Recent Debt Breakdown

The yield curve

Higher Fed rates and massive debt issuance pushed rates up significantly across the yield curve, but especially on the short side. The 2-year closed the week at 4.66% and the 10-year at 4.16%. This made the yield reversal from 10 to 2 to 50 bps.

Figure: 12 Yield Curve Inversion Tracking

Despite the fact that interest rates continue to rise and liquidity in the bond market is drying upthe bid/cover ratio for new bond issues remained stable around 2.5.

Figure: 13 Submission to be covered over 2 years and 10 years

Historical perspective

While total debt now exceeds $31,000,000, not all of it poses a risk to the Treasury. There are over $7 billion in non-marketable securities which are debt securities that cannot be resold and which the government generally owes to itself (e.g. Social Security).

Figure: 14 Total outstanding debt

Unfortunately, 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 has fallen to 24%. In recent months, the Treasury has increased issuance of non-negotiables, but this has not been enough to make up for lost ground.

Figure: 15 Total outstanding debt

Historical analysis of debt issuances

The table below breaks down the trends shown above with specific numbers.

Figure: 16 Debt details over 20 years

It may take some time to digest all of the above data. Here are some main takeaways:

    • Average interest rates on bonds have went from 0.37% to 2.24% in 6 months
        • This increased annualized interest from $14.1 billion to $82.1 billion.
    • The increased interest in the notes has been slower, increasing by 20 basis points in 6 months
        • Despite the relatively small move, the dollar increase is $40 billion
    • Each 0.25 bp hike will cost the Treasury $59.4 billion after it walks the curve.
        • The current move to 4% would cost the Treasury $950 billion in interest if all debt were refinanced at that level.
        • 20 years ago the interest was 4.48%, so it wouldn’t be out of the ordinary

What this means for gold and silver

The Treasury cannot afford higher interest rates, especially since new debt issuance is well over $1 billion a year. The Treasury is on the verge of a debt spiral. If the Fed keeps rates high for another 12 months, debt interest will spiral out of control.

The Fed is moving so fast with interest rate hikes that it won’t even realize it broke something until it’s way too late. Inflation remains high but each week brings the Treasury closer to spiraling debt and the economy closer to a full blown collapse.

The Fed will pivot as soon as possible because it has no other choice. At that time, gold and silver will take off. Investors got a taste of this Friday with both metals exploding higher and ending on the day’s highs. Miners led the way, rising 10%. While the metals weren’t out of the woods, Friday was a preview of the moves to come.

The data source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

Data updated: monthly on the fourth working day

Last update: October 2022

Interactive charts and graphs of US debt are still available on the Explore Finances dashboard: https://exploringfinance.shinyapps.io/USDebt/

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John A. Bogar