Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

A New Paradigm: Interest Grows Even When Total Debt Shrinks

  by    0   1

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.

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

Interest Rates

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

Historical Perspective

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 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 the short-term debt has shrunk as a percentage of the 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

What it means for Gold and Silver

Buckle up! The Fed is talking tough but they are trying to defy simple math. If the Fed gets aggressive with interest rates, the Treasury could quickly see annual interest rise by over $100B (a 33% increase on current levels). With the Fed gone as the biggest buyer in the market, who will absorb this new debt? Interest rates will get pushed up. This is why rates are exploding higher. Is this the beginning of the debt spiral? The Treasury could be spending $500B just on debt service in short order!

The Treasury has done all it can to extend the maturity and obtain free loans from Non-Marketable debt. Unfortunately, time has run out. The debt has not been a problem for years. As Janet Yellen said, low-interest rates have made the debt manageable. Well, that is no longer the environment. No more tricks, this is where the math takes over. Either the Fed rescues the Treasury by starting QE back up or the Treasury enters a debt spiral. This will not play out over several years… this is something happening right now and will dramatically change the outlook of the budget deficit within 18 months.

Even when debt shrunk, interest went up. This is a new paradigm. Don’t expect the dip seen in April to continue. Debt is about to begin soaring again which will make matters worse. Are you prepared? Precious metals offer insurance against this exact scenario.

Data Source: https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

Data Updated: Monthly on the fourth business day

Last Updated: Apr 2022

US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/

Download SchiffGold's Free Silver Report

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Foreign Holders Join the Fed in Reducing Holdings

Breaking Down the Balance Sheet The Fed balance sheet fell during May by $25B. This was the first monthly decline in the balance sheet since $220B of “Other” rolled off in July 2020. In that case, “Other” were repurchase agreements with foreign entities to provide liquidity and alleviate stress in the global markets.

READ MORE →

Monthly M2 Shrinks for the First Time in Over 12 Years

According to the seasonally adjusted data, M2 contracted by $83B in April. The Money Supply analysis last month highlighted the slowing money supply growth rate, but this is the first contraction seen since January 2010.

READ MORE →

Technical Analysis: Has This Gold Pullback Run Its Course?

The price analysis last month identified the near-term risk that gold could fall below $1880 and even $1850 despite a medium-term bullish outlook. The $1800 level was identified as a key marker for keeping the bull move intact. So far, that has held and produced a solid bounce back towards $1850 which becomes the next hurdle.

READ MORE →

Comex Countdown: Gold Shows Strength while Silver Sees Cash Settlement

This analysis focuses on gold and silver physical delivery on the Comex. See the article What is the Comex for more detail.

READ MORE →

Comex: Total Inventory Grows but Supply to Meet Delivery Shrinks

This analysis focuses on gold and silver within the Comex/CME futures exchange. See the article What is the Comex? for more detail. The charts and tables below specifically analyze the physical stock/inventory data at the Comex to show the physical movement of metal into and out of Comex vaults.

READ MORE →

Comments are closed.

Call Now