The Treasury added almost $400B of debt in January, the third most since July 2020. The other two larger amounts were both right after the debt ceiling was raised. Perhaps most important is the fact that almost $200B of the newly added debt was in short-term Bills (turquoise below).
Bills represent debt maturing in less than 1 year. As can be seen, the Treasury has actively been working to reduce short-term debt over the last 18 months to extend the duration of the debt, making it less sensitive to an increase in rates. An increase of $200B is not a step in the right direction for them.
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
The next graph below shows the annual debt added. This view more clearly highlights the effort in 2021 to reduce Bills outstanding.
In January, the Treasury added almost as much debt as was added in all of 2017. Before the financial crisis, US Debt was growing between $500B-$900B per year in total. Now, that almost occurs in a single month!
Figure: 2 Year Over Year change in Debt
The reason the Treasury was actively trying to reduce Bills outstanding, is the risk posed by having such short-term debt. The last time the Fed started hiking rates in 2015, annualized interest on Bills increased from $0 up to $60B in very short order.
The Fed spread the hikes over several years. They are now targeting 10 hikes in the next 30 months; however, the balance of Bills is 70% higher than 3 years ago. This means the interest on Bills could very quickly hit $100B a year, up from $0 today. Will the Fed actually let that happen?
Figure: 3 Total Debt Outstanding
The latest debt binge has also been used to pad the Treasury balance sheet. As shown below, the cash available on the Treasury balance sheet has grown by $700B in a single month!
Figure: 4 Treasury Cash Balance
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 total debt outstanding has exceeded $30T in January
- In the current month, only 3–7-year debt and “Other” saw declines
- The 3–7-year debt has increased more than any other line item over 12 months by a wide margin
- The current month more than doubled the aggregate 12-month average ($395B vs $185B)
- On a TTM basis, the Bills balance is still negative by $800B despite the $200B increase this month
Figure: 5 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 January, the Treasury rolled over $1.14T. Before Covid, the Treasury was rolling over just under $1T a month, so it is still above this figure.
Figure: 6 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 25% ($1T) 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 $9.9B 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 $39.6B a year in interest payments just on Bills.
Figure: 7 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: 8 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 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: 9 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.
The recent spike in 2-year rates should not go unnoticed. In August, the 2-year rate was below 0.25% and it has now increased to 1.2%. The 2-year rate is front running the 3-month rate and causing a flattening of the yield curve.
Figure: 10 Interest Rates
The spread between the 2 and 10 year can be seen below. It is falling as rapidly as it was from 2015-2016. Will the yield curve invert?
Figure: 11 Tracking Yield Curve Inversion
The loudest critics of the US Debt and Fed monetary policy will point to $30T 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: 12 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 but is slowly starting to move up even before the Fed hikes rates. 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 in 15 months.
Figure: 13 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: 14 Debt Details over 20 years
It can take time to digest all the data above. Below are some main takeaways:
- Bills have increased from $793B to $3.9T over 20 years yet Annualized interest has fallen from $20.3B to $3.7B
- The impact of a .25% interest rate hike is up 5x from $2B to $9.9B
- As recently as 3 years ago, annual interest on Bills was $53.5B, despite a balance that is 72% larger now. Rates only reached 2.33% 3 years ago.
- Returning to 5% on Bills would cost the Government $198B a year!
- Bills make up 13.2% of the debt, up from 10.5% three years ago
- Notes made up 23.8% of total debt balance 20 years ago but has surged to 43.8%
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 $277B 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: Jan 2022
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