The debt ceiling was raised in December and the Treasury responded immediately, adding $709B in debt over the month. To be fair, $470B of this was in Non-Marketable as shown below.
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
Of the $470B in Non-Marketable, $261B was used to replenish the Federal Retirement Fund which is raided each time the Treasury uses extraordinary measures. Another $118B went to the Highway Trust Fund with the Disability Fund getting $76.5B. Most of this debt is interest-free, but it’s used in emergencies so that the government can issue debt to the public as shown in the chart above for November and August.
Regardless, this does not change the bigger picture shown below where the Treasury added $1.9T to the debt in 2021. This wasn’t quite the $4.5T in 2020, but it occurred during a year that saw record tax revenues.
Figure: 2 Year Over Year change in Debt
What happens if those tax revenues dry up? What happens if the economy goes into recession… maybe from the Fed getting aggressive with a taper. So far, the ability to taper has been mixed. The chart below shows why. What happened the last time the Fed started tightening? Annualized interest payments increased by $100B within 18 months. And don’t forget, that was $8T ago!
Figure: 3 Total Debt Outstanding
Table des matières
Digging into the Debt
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 has actively been replacing short-term debt with medium-term debt to reduce interest rate risk
- Nearly $1.2T in short term debt was replaced by longer maturities in 2021, but this effort has faded the last three months
- Interestingly, in the last two months < 6 Months has been increasing, offsetting the maturity of 6-12 month
- Notes are still getting longer in maturity
- 1-3 year fell this month by $18B while 3-10 year increased almost $165B
- Across all 2021, Notes increased nearly $2T
- After issuing roughly $0 in 7-10 year during 2020, the Treasury issued $448B in 2021. This is still below the $551B in 2019.
- Bond issuance also increased significantly, rising from $460B to $641B YoY
The Treasury actively reduced Bills outstanding for most of 2021; however, over the last three months, total Bill outstanding has increased $55B. If the effort to reduce Bills has stopped and potentially reverses, it leaves $3.7T in debt highly susceptible to Fed rate hikes.
Figure: 4 Recent Debt Breakdown
Rolling over debt is using new debt to pay back 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 December, the Treasury rolled over $1.34T. Before Covid, the Treasury was rolling over just under $1T a month, so it is still well above this figure.
Figure: 5 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 $9.4B in additional annual interest payments within 6 months.
Said differently, if the Fed raises rates by 1% in 2022, the Treasury will owe an additional $37.6B a year in interest payments just on Bills.
Figure: 6 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 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 would fall further, especially considering foreign governments are losing their appetite for Treasuries.
Figure: 7 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 at $2.5T. 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: 8 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.
This is why the Fed cannot actually raise rates and will most likely need to go back to QE in the future.
Figure: 9 Interest Rates
Recently, rates have started moving up. The 2-year is rising faster than the 10 year which has resulted in a dramatic fall in the yield curve as shown below. In two months, the spread fell from 1.29% to 0.72%!
Figure: 10 Tracking Yield Curve Inversion
The loudest critics of the US Debt and Fed monetary policy will point to $29.6T in US Debt and quickly calculate that every .25% interest rate move costs the US $75B 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 $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).
Figure: 11 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. With the Fed talking tough, the Treasury market could be there by next summer.
Figure: 12 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: 13 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 $3.7T over 20 years yet Annualized interest has fallen from $23.7B to $2.3B
- The impact of a .25% interest rate hike is up 5x from $1.8B to $9.4B
- As recently as 3 years ago, annual interest on Bills was $52.1B, despite being 50% larger now. Rates only reached 2.23%.
- Returning to 5% on Bills would cost the Government $188B a year!
- Bills still make up 12.7% of the debt, up from 10.6% three years ago
- Notes made up 23.8% of total debt balance 20 years ago but have surged to 43.9%
- 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 820% from $1.4T to $13T, yet interest has only increased 123% to $100B
- If avg interest rate returned to 5.75% (up from today’s 1.34%), total annualized interest would clock in at $747B!
- Bond balances are also up 477% while interest is only up 111% ($49.7B vs $104B)
- Avg maturity has been extended some increasing from 2.8 years to 3.5 in Notes and from 17.8 years to 21.9 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 7%, this would utterly devastate the Treasury’s ability to manage its debt load. Interest on Bills would increase by $263B in 6 months. Annualized interest on Notes could surge more than $700B within a few years.
Bottom line: if the Fed has to fight inflation it will cost the Government almost $1T a year in interest. 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. The Fed is playing chicken with the market, but they will fold because they have no other viable option. When the market figures this out, gold and silver will move significantly higher and the 7% inflation of today will be considered low inflation.
Data Updated: Monthly on fourth business day
Last Updated: Dec 2021
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