The following analysis breaks down the Fed balance sheet in detail. It shows different parts of the balance sheet and how those amounts have changed. It also shows historical interest rate trends. The analysis concludes that the resulting lack of Treasury demand is likely another reason Yellen is betting $2T on lower interest rates… she has to focus on the short-term of the curve to make sure the market can absorb the debt!
A Major Trend Change
In 2023, the Treasury added $2.6T to the national debt. While that number alone should be enough to scare anyone, the details reveal something even more concerning. $2T of it, or 77%, was financed entirely with short-term Treasury Bills maturing in less than a year. The chart below shows the debt issuance trend over the last 20 years. As shown, the Treasury typically relies on medium-term debt (2-10 Year Notes) to fund the budget deficit. 2023 was a massive change in standard procedure as shown by the giant light blue bar on the right of the chart.
After a delicate dance of interest rate increases, Jerome Powell has declared victory on inflation and says to expect looser monetary policy this year. But with junk bond spreads not widening nearly as much as one would expect during an era of economic tightening, you’ve got to wonder if money is still actually looser than the Fed’s last round of hikes would lead you to believe.
In the realm of institutional asset management, the copper/gold ratio (blue line) has served as a key indicator for some, providing insights into the potential trajectory of 10-year Treasury yields (red line).
The US is on the brink of a debt disaster, spiraling into $33 trillion of debt. That is over 180% of GDP.
The cause?
Skyrocketing government spending matched with insufficient tax revenues, leading to ever-deepening deficits.
The US Treasury is now low on credit and out of time.
Interest payments on this colossal debt have doubled since 2020, pushing the government into a corner. The Federal Reserve’s 2023 decisions to raise rates add to the turmoil, and the US Treasury is running out of debt buyers. A recent Treasury auction turned chaotic, revealing a global decline in appetite for US debt.
Our guest contributor asks the question of the hour: Are the chickens coming home to roost for the US Treasury?
The Federal Government ran a deficit of -$262B in February. Ignoring the Student Loan forgiveness allocation in September last year, this is the largest monthly budget deficit since July 2021. And it’s the second-largest February deficit ever.
Despite hitting the debt ceiling, the US Treasury managed to add $35 billion in new debt during January.
The Treasury has employed extraordinary measures, including exchanging Non-Marketable (e.g., Government employee retirement funds) and other forms of debt for short-term Bills. The balance on Bills grew by $241 billion which was the largest single-month growth since at least January 2021.
Over the last 18 months, the Treasury has aggressively converted short-term debt to longer-term debt. This can be seen in the chart below with the turquoise bars being negative.
The federal government ran a $220 billion deficit in August. It was the largest monthly deficit since last July.
The US government increased its total debt by $69 billion in June. The average interest rate on all of that debt is also going up, a growing problem for the borrow and spend government.
The Treasury Department continues to roll short-term Treasury Bills into longer-dated securities, allowing $148B in Bills to roll off the debt statement this month.