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Yellen Continues Betting on Interest Rate Declines

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In February, the data showed that Yellen was making a big bet that long-term rates would not stay elevated for long. This was demonstrated by the volume of short-term debt issuance. The Treasury was willing to pay higher rates to keep the maturity of the debt shorter.

This continues to be the case. Over the last two months, the vast majority of new debt has been in short-term Treasury Bills (1 year or less).

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

In the first three months of 2024, the Treasury has added over $600B in new debt, more than half of which is short-term.

Figure: 2 Year Over Year change in Debt

So far in 2024, the Treasury has kept a fairly stable cash balance of $800B.

Figure: 3 Treasury Cash Balance

The chart below shows the true danger of the current actions by the Treasury. You have the average interest rate of the debt moving up very quickly while the average maturity is dropping. The blue line demonstrates the actions to issue so much short-term while the orange line shows the current high-interest rate predicament. The hope is that as interest rates fall, they can reverse both of these lines together. But what if interest rates stay elevated?

Figure: 4 Weighted Averages

Honestly, they can’t because the Treasury simply cannot afford it. Fed officials can run their mouths all they want about being data-dependent, but the chart below is the only data that matters. The trajectory of interest rates is completely unsustainable.

Figure: 5 Net Interest Expense

Using the current Fed dot plot and the rolling maturity of the debt produces the forecast below. Again, the Treasury left “debt affordability” in the rearview mirror in 2021. The Treasury is now absolutely hemorrhaging cash on debt service costs.

Figure: 6 Projected Net Interest Expense

Speaking of debt issuance and rollover, the chart below shows the forecasted debt maturing this year for 2-10-year maturities. Debt rolling over will be more than $500B higher than it was in 2023 despite the fact they are adding almost no new debt to the note balance.

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

Figure: 7 Treasury Note Rollover

Yield Curve

Adding more confusion to the Treasuries decision is the inverted yield curve. The Treasury could be paying lower rates today by issuing longer-term debt. The two issues are market saturation and debt lock-in. The market cannot absorb massive volumes of long-dated Treasury debt. Yellen also does not want to lock in these elevated rates.

Figure: 8 Tracking Yield Curve Inversion

Historical Perspective

The chart and table below show how the debt and interest have changed over time.

Figure: 9 Total Debt Outstanding

Figure: 10 Debt Details over 20 years

Wrapping Up

Many Fed officials and market pundits have called the current fiscal situation “unsustainable”. This is a gross understatement. The current fiscal situation is an absolute train wreck with no way out. It has been called a ticking time bomb for decades. That bomb has gone off and it is worse than anyone could have imagined. Anyone who is sticking to the soft landing narrative and justifying this as a future problem is not doing simple math. Buckle up!

Data Source:

Data Updated: Monthly on fourth business day

Last Updated: Mar 2024

US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard:

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