Treasury interest cost to top $500 billion in coming months

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by SchiffGold 0 0

The Treasury increased total debt by $69 billion in June. The Treasury continues to convert short-term Treasury bills into longer-dated securities, allowing $148 billion worth of bills to exit the debt statement this month.

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

Total debt has increased in 2022 by $950 billion. The conversion from short term to long term is clearly visible in the table below. Last year, the Treasury converted $1.2 billion from short term to long term, or an average of $100 billion per month. Halfway through 2022, that number has dropped to $246 billion or $41 billion per month.

Figure: Change in debt over 2 years

The impact of this move can be seen below. The weighted average debt maturity is now 6.18 years, compared to 5.15 at the height of the Covid crisis. This is the longest debt maturity since at least January 2001, when the data is fully available.

The impact of higher rates can also be seen. As the Treasury continues to refinance debt at much higher interest rates, the average interest rate is rising. In the last month, it has reached 1.5%. This is still well below current rates, suggesting there is room for it to grow much further.

Figure: 3 weighted averages

The impact of the higher rates can be seen below. The chart represents the annualized interest on the main types of securities (i.e. bills, bonds, notes and TIPS). The black line represents the TTM net interest paid according to the statement from the Treasury which summarizes the expenditure.

The difference between the two represents non-marketable securities and inflation-related expenses. Whatever the difference, one thing is clear: interest charges increase. The latest Treasury statement was released in early June, capturing spending through May and showing $423 billion in net interest!

Unfortunately, this latest push hasn’t even begun to factor in June’s 75bps hike or the next 50-75bps hike expected this month. That means the Treasury pays $423 billion in interest before rates increased by 150 basis points. There is no doubt that net interest expense is about to explode through $500 billion.

Figure: 4 Net interest expense

Dig into debt

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

    • The last two months have seen much more aggressive moves in the liquidation of short-term debt
        • ~$170 billion per month vs $53 billion 12-month average
    • 1-3 year notes also saw a monthly reduction of $41 billion – another move to extend maturity
    • The non-tradable is also climbing at a faster rate than the 12-month average

On a TTM basis:

      • Debt has increased by $2,000,000 in the past 12 months, almost exactly like the previous 12 months
          • The distribution of emissions has changed considerably (penultimate column), moving from 0 to 7 years but increasing dramatically (350%) in instruments from 7 to 10 years
      • In the last 3 years in a row, debt has exploded by more than $8.5 billion

Figure: 5 Recent Debt Breakdown

Debt rollover

As mentioned above, annualized interest is expected to explode even higher in the coming months. The graph below shows the debt that will be rolled over in the coming months. It will be trillions of debt that will all be refinanced at rates 150 basis points higher!

Figure: 6 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. Interestingly, the Bid to cover The ratio has fallen quite rapidly over the past few months, indicating a drop in market demand for short-term debt. This drop in demand is surprising given the drop in emission rates.

Figure: 7 Supply of treasury bills to hedge

Treasury Notes (1-10 years)

The other maturities do not show the same drop in demand. While the 10-year hedging supply has fallen, it is still hovering around 2.3-2.4, with the 2-year demand remaining strong.

Figure: 8 Submission to cover over 2 years and 10 years

Interest rate

The chart below shows the path of interest rates since 2000. The Treasury has benefited greatly from a steady rate cut over the past 20 years. The tide has clearly turned as interest rates have exploded higher than ever before. The current move has happened faster than in 2006 and 2017. This is why interest payments are rising so rapidly, not to mention the huge debt balance.

Figure: 9 Interest rate

Historical perspective

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. 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: 10 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 has fallen below 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: 11 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: 12 Debt details over 20 years

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

    • In a single year, bills have gone from 15.5% of the total to 11.5%
        • Bonds now account for 12.3% of total debt, the highest value according to available data
        • Notes represent 44.4% of total debt, almost double from 20 years ago
            • Average maturity increased from 2.76 years to 3.51 years
    • Average interest rates on Notes are now 1.48%
        • That’s up from a year ago, when the average rate was 1.35%
    • Annual interest on bonds increased from $2.6 billion 6 months ago to $27.8 billion today
        • It’s a massive move in 6 months and it’s just getting started
        • Interest on the notes increased by 20 billion dollars in 6 months – this is due to the increase in the balance and the higher rates (1.34% to 1.43%)
        • Interest on bonds has increased by $10 billion in the past year due to higher balances, rates have fallen from 3.16% to 3%

What this means for gold and silver

The Treasury sees its interest payments explode rapidly. With the Fed’s aggressive action plan, the impact of higher rates is felt much faster than in previous rate hike cycles.

The Treasury must hope that the Fed will quickly win its fight against inflation and can immediately lower rates. Every rate hike will bring massive new costs to Treasury spending and every month that rates stay high gets more debt rolled over at higher rates. It’s not sustainable!

The note balance is $13.5 T with an average rate of 1.43% and a maturity of 3.5 years. With current rates at 3%, the Treasury would owe an additional $200 billion on notes alone if refinanced at current rates! This does not include bills, does not include new debt to be added, and does not take into account the impact of future rate increases.

The Treasury has maneuvered to lessen the impact of the rate hike, but there’s not much to do with $30 trillion. Higher rates are devastating. The Fed doesn’t have time for a long fight against inflation, but it still has extremely negative real rates, so the fight has only just begun. The Fed may talk tough, but the math is clear…there is little they can do before sending the Treasury into a spiral of debt.

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

Data updated: monthly on the fourth working day

Last update: June 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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