The Treasury reduced the total debt by $27B in April. This is not atypical since Tax Day falls in April. In April 2016 and 2018, the debt shrunk $78B and $21B respectively. April 2017 and 2019 were both flat due to a debt ceiling saga. 2020 and 2021 were exceptions because the tax deadline was extended.
This article was originally published by Schiff Gold.
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
Unfortunately, even though the total debt shrunk, annualized interest actually increased by $7B between March and April! This is due to increased interest rates. The 25bps Fed hike in March is just starting to be felt. It will take 6 months to feel the initial effects in Bills, and the Fed raised rates another 50bps yesterday, with another 100bps planned by August.
By the end of the year, the Treasury will be paying another $70B per year on its short-term debt. Keep in mind, that the total debt was costing the Treasury about $300B a year as recently as January. The increase expected based on a Fed Funds of 2.25% is a +25% increase on annualized debt! This is only for Bills and only in the immediate future! The problem will only get worse as maturing debt is refinanced and new debt is added.
Speaking of new debt, despite the reduction in April, the Treasury has still added $800B in debt so far in 2022 as shown below.
Figure: 2 Year Over Year change in Debt
The impact of higher interest rates can be seen in the chart below. With the Feds’ “aggressive” path ahead, expect the Bills (light green) to start becoming a major driver of higher interest.
Figure: 3 Total Debt Outstanding
The chart above shows interest as a % of total debt ($30T). The chart below shows the weighted average on just Marketable debt ($23T held by the public, $5.7T of which is held by the Fed). In just one month, the weighted average interest increased from 1.3% to 1.4%. This will be on a steep trajectory upwards in the coming months.
Figure: 4 Weighted Averages
Digging into the Debt
The Treasury knows the bind it’s in. This is why the weighted average maturity is at the highest level in 20 years (blue line above). Figure 2 shows the effort by the Treasury in 2021 to reduce short-term debt (falling green bar). Unfortunately, the debt is so large that even with the extended maturities, short-term debt maturing in less than 12 months still totals $3.8T.
This can be seen in the table below. Other points to highlight:
- Despite the fall this month, the 12-month average increase in total debt is $183B
- In Apr 2021, the Treasury had increased 7–10-year debt by $51B over the TTM. In Apr 2022 that figure jumped 1,276% to $702B
- This is where the Treasury stashed nearly all the short-term debt that rolled off over the last year ($710B)
- The Treasury has found additional relief in the 20-year bond issuance totaling ~$300B the last two years without reducing 20+ year issuance
Figure: 5 Recent Debt Breakdown
Despite the increased issuance of longer-term debt, the Treasury is clearly in trouble. The chart below shows the trajectory of interest rates since 2000. It has benefited greatly from a consistent reduction in rates over the last 20 years. The tide has clearly turned as interest rates have exploded upwards unlike anything seen in recent history.
Figure: 6 Interest Rates
After briefly inverting, the yield curve has steepened some. With the Fed’s aggressive path forward, it will most likely force invert the yield curve unless long-term rates really start to climb.
Figure: 7 Tracking Yield Curve Inversion
While total debt has now exceeded $30T, not all of it poses a risk to the Treasury. 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). The Fed owns $5.7T, which also poses zero risk because the Fed remits all interest payments back to the Treasury. Unfortunately, that benefit has reached its peak (for now) as the Fed prepares for QT.
Figure: 8 Total Debt Outstanding
The chart below shows how the reprieve offered by non-marketable securities has been fully used up. Pre-financial crisis, non-marketable debt was more than 50% of the total. That number has fallen below 25%.
Figure: 9 Total Debt Outstanding
Historical Debt Issuance Analysis
As shown above, recent years have seen a lot of changes to the structure of the debt. Even though the Treasury has extended out the maturity of the debt, it no longer benefits from the free debt in Non-Marketable securities. Furthermore, the debt is so large that even though short-term debt has shrunk as a % of total, it is still a massive aggregate number.
Figure: 10 Debt Details over 20 years
It can take time to digest all the data above. Below are some main takeaways:
- In a single year, Bills have fallen from 16.1% of the total to 12.6%
- Bonds now make up 12% of the total debt, higher than even 20 years ago
- Notes make up 44% of the total debt, nearly double the amount 20 years ago
- Average maturity has increased from 2.78 years to 3.45 years
- Average interest rates on notes are now at 1.35%
- This is set to move up quickly as debt is rolled over at 3%+ rates
- Annual interest on bills has increased from $2.3B 6 months ago to $14.1B today
- This move single handedly pushed interest on the Total Marketable from 1.33% to 1.36% in 6 months