US Debt Analysis: June 2021
The US Government is on an unsustainable debt trajectory. Even though the Federal Reserve has acknowledged this fact, most mainstream figures consider it a distant problem or even not an issue at all. The argument highlights that debt fears have raged since the debt crossed $1T decades ago and no negative consequences have materialized. This analysis digs into the detail of the debt to show why the US Government is at much greater risk than even a few years ago.
By downloading Cusip level data back to 2000, the analysis is both deep and wide. It starts with a trend analysis specifically focusing on the debt rollover by product. The most recent numbers show how the Treasury is managing the debt post-Covid. A deeper look into history demonstrates the changing debt makeup. The analysis concludes with commentary on how this is relevant to gold and silver.
For readers looking to just see the latest month over month numbers, skip ahead to the section: “Digging into the numbers”
Understanding the Trends
The loudest critics of the US debt and Fed monetary policy will point to $28T in US Debt and quickly calculate that every .25% interest rate move costs the US $70B a year. 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 are $6T+ of Non-Marketable (Non-Mrkt) securities which are debt instruments that cannot be resold. The vast majority of Non-Mrkt is money the government owes to itself. For example, Social Security holds over $2.8T in US Non-Mrkt debt, almost half the total Non-Mrkt amount. This debt poses zero risk because any interest paid is the government paying itself.
The remaining $22T is broken down into Bills (<1 year), Notes (1-10 years), Bonds (10+ years), and Other (e.g. TIPS).
Figure: 1 Total Debt Outstanding
While it may help that 20% of debt is owed to itself, it still leaves a massive $22T to wrestle with. Another point of relief is the $5T held by the fed, which is an interest-free loan (more on this below). Even with the $11T in interest-free loans, the primary risk the government faces is not new debt issuance (it could just cut spending), but instead rolling over existing debt.
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 at what is maturing in the future. As shown below, the majority of debt issued each month is actually roll over, with only a small percentage being new debt (red bar), which can even bring total debt down when more matures than is issued (on occasion).
Figure: 2 Total Debt Outstanding
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
From 2012-2016 about $500B a month was rolling over (mostly short-term as shown below). This started moving up in 2017, reaching $1T a month by 2020 before jumping to $1.5T as Covid hit. Another important factor is the red bar showing how much of the issued debt is new debt being added.
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 at above $1.5T.
T-Bills (< 1 year)
There is currently $4T outstanding in short-term treasury bills, up more than double the amount 3 years ago. The Treasury tends to finance surges in spending with Treasury Bills because they are well accepted by the market. The plot below shows the Bid to Cover ratio for short-term T-Bills. A higher Bid-to-Cover indicates stronger demand. While demand is off from its peak during 2012-2015, a bid-to-cover above three is still strong. Especially considering how much more short-term debt has been issued in recent years.
Figure: 3 T-Bill Bid to Cover
While demand for T-Bills may be strong, it poses a risk to the Treasury. Each month almost 35% (1.5T) rolls, 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 $10B a month in additional annual interest payments within 6 months.
As discussed below, the Treasury is making an effort to convert some of the Treasury Bills into Notes. If this effort is successful, the short-term risk will decrease somewhat; however, it may prove more challenging to restructure most of its short-term debt, especially with all the new spending planned. Even if successful, it’s mostly rolling into 1-7 year debt which only provides some short-term relief.
Figure: 4 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 new debt because there wouldn’t be enough demand and interest rates would be pushed up.
Figure: 5 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 even though the net change in debt is still below the levels in 2008 and 2009.
The year 2022 will be the largest year ever in Notes that need to be rolled over. This is just showing debt that already exists and needs to be refinanced. What also needs to be considered is the new spending and also the efforts to convert T-Bills into Notes as mentioned above. Furthermore, the last /red bar represents 2021 through June, which means if the current trajectory maintains, total Note issuance for 2021 could approach $4T (the light green bar of $1T+ still needs refinancing in 2021)! It will be important to watch this chart in the coming months to see how the Treasury handles Note issuance.
Figure: 6 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.
Figure: 7 Interest Rates
Recently, the 10-year and 2-year rates have started moving back together. While there is still distance before the yields invert (as shown below), it is a trend to watch. Perhaps driving this convergence is the debt issuance by the Treasury over the last few months, focusing Note issuance at the shorter range rather (1-7yr) than the longer end (7-10yr) as shown in the tables below.
Figure: 8 Tracking Yield Curve Inversion
Digging into the numbers
Recent Debt Issuance Analysis
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).
While these numbers are skewed due to the massive debt issuance during Covid, it doesn’t change the fact that managing the debt has become more complicated. These tables show how the Treasury is trying to restructure while also dealing with new debt issuance.
Figure: 9 Recent Debt Breakdown
- Short-term debt is maturing and rolling into long-term debt. The last 12 months have seen < 6-month debt change by -71.4B on average, which accelerated in May and June to -260.2B and -76.2B.
- The difference is being made up across Notes, with June more than tripling the TTM average in 3-7 years (64.5B to 209.5B) and 7-10 years (12.5B to 83.9B)
- Comparing the TTM periods shows the true strength of this trend:
- < 6-month totaled 2.5T through June 2020 but changed by -856B since
- 1-3-year and 3-7- year are both more than 2.5x larger in the recent TTM vs Jun 2020
- 7-10-year issuance is actually down and long term bonds are up 50%
The end result is that debt is being refinanced into longer maturities but it is still heavily concentrated on the short end of the curve (1-7-year). This will only create more risk in the years to come. The Note Rollover chart (Figure 6) shows that 2022 will be a record year for Note maturity, but given these trends that record will undoubtedly be broken in the near future.
Historical Debt Issuance Analysis
While recent years have seen a lot of changes to the structure of the debt, with risk being brought forward up the yield curve. Looking at a longer historical period shows an even more stark picture of how dramatic the changes have been. This table 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: 10 Debt Details over 20 years
It can take time to digest all the data above. Below are some main takeaways:
- Bills have increased from 620B to 4.2T over 20 years yet Annualized interest has fallen from 28.1 to 3.1
- The impact of a .25% interest rate hike is up 7x from 1.6B to 10.7B
- As recently as 3 years ago, annual interest on Bills was 36.7B, despite half the current size. Rates only reached 1.7%.
- Returning to 4.5% on Bills from 20 years ago would cost the Government $180B a year!
- Bills still make up 15% of the debt, up from 11.7% 20 years ago but down from 20% one year ago
- Notes made up 28% of total debt balance 20 years ago but has surged to 43%
- 20 years ago 46.5% of debt was Nonmarketable (owed to itself – posing no risk), but that well has seemingly gone dry
- Notes increased nearly 10 fold 1.4T to 12T, yet interest has only doubled 86.1B to 177.4B
- If avg interest rate returned to 5.8%, total annualized interest would clock in at $700B!
- Bond balances are also up 6x while interest is only up double (51B vs 100B)
- Avg maturity has been extended some increasing from 2.7 yrs to 3.5 in Notes and from 18 yrs to 21.8 in Bonds
What it means for Gold and Silver
The Treasury is out of tricks. Interest rates have bottomed and the intra-government debt well 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 as well which would prove devastating given the balance size.
Thus the Fed cannot raise short-term rates and it needs to keep long-term rates contained. Given the number of Notes set to rollover in the years ahead, any effort to taper will be “transitory” at best. With the Fed forced to continue aggressive monetary policy indefinitely, it is almost certain inflation will prove much more persistent than the Fed is leading on. Other countries do not have the same risk/exposure as the Treasury which means the dollar could come under significant pressure as the Fed is unable to act to combat inflation while foreign central banks do. Gold and silver offer great protection against a devaluing dollar in this environment.
A critical point
Not only does the Fed alleviate pressure on the Treasury by keeping interest rates low across the curve, but the debt the Fed buys equates to an interest-free loan. Any interest the Fed receives from its balance sheet is returned back to the Treasury. “Only” $5.2 of the $8T balance sheet is in Treasuries, but it is almost all in Notes. While this does offer medium-term protection, the Treasury is still exposed to short term rates. Furthermore, it also means the Fed will be unable to shrink its balance sheet or the medium-term protection will be immediately lost. This should be considered when reviewing the information above and the impact of rising rates. A breakdown of the Fed balance sheet is forthcoming.
Data Updated: Monthly on the fourth business day
Last Updated: Jun 2021