Interest rates

Treasury scrambles to lock in rates as cost of borrowing soars

by SchiffGold 0 0

The Treasury increased total debt by $125 billion in May after a brief decline in April. This brings the total increase in debt so far in 2022 to $880 billion. More importantly, however, the cost of servicing debt is skyrocketing. Total annualized interest has increased by $40 billion or 13.5% since the start of the year!

As the Fed continues to drive interest rates higher, this problem has only just begun. The Treasury recognizes this and takes action. As seen below, this is the third month in a row that the Treasury has dropped short-term bonds and replaced them with longer-term debt.

Note: Non-negotiables consist almost entirely of debt the government owes itself (e.g. debt to social security or public pension)

Figure: Month-on-month change in debt

In January and February, shortly after the debt ceiling was lifted, the Treasury erupted, adding $675 billion in debt in two months. To help the market absorb so much debt, it issued $283 billion in short-term notes. In the past three months, he has completely reversed that decision and has now let the total bill balance shrink by $97 billion.

Figure: Change in debt over 2 years

This is a critical move by the Treasury as it tries to stay solvent in the face of higher rates. After all, Janet Yellen is well aware of the importance of low interest rates in keeping debt manageable.

The short-term part of the debt is very exposed to short-term movements. The chart below shows that bond interest (12% of the total balance) has increased by $18 billion since January. Interest on notes (44% of total balance) increased by $15 billion, while interest on bonds (12.2% of total balance) increased by $6 billion.

Although they represent only 12% of the total debt balance, bonds represent the main contributor to the increase in the cost of debt this year. While the Fed is poised to hike rates an additional 100 basis points by August, interest on bonds will rise by at least another $36 billion by the end of the year!

Figure: 3 Total outstanding debt

The chart above shows interest as a % of total debt ($30,000). The chart below shows the weighted average on marketable debt alone ($23,000,000 held by the public, including $5.7,000,000 held by the Fed).

The Fed’s latest decision to extend the maturity of debt took the average maturity from 6.05 years to 6.16 years in a single month. This is represented by the spike in the blue line on the far right of the chart. The Treasury is acting as quickly as possible to reduce exposure to short-term rates.

Figure: 4 weighted averages

The Treasury also uses its cash balance to help reduce the amount of new debt issued. After rebuilding the cash balance following the debt ceiling saga, the Treasury has already used $200 billion in cash, bringing the balance from $964 billion on May 5 to $757 billion on June 3. .

This may be the main reason Powell dragged his feed on the rate hike. He was unable to do so during the debt ceiling debate and then gave his friend Yellen two months to issue as much debt as possible before raising rates.

With Powell and Yellen assuming this is a temporary interest rate hike, they likely think they are in good shape to weather the “brief” spike. The problem will arise when the rise in interest rates turns out to be anything but transitory.

Figure: 5 Treasury Cash Balance

Debt rollover

Despite all these movements of the Treasury, it cannot avoid the inevitable refinancing of the debt at higher rates. There is simply too much debt. The chart below shows that it will roll over its debt of over $3 billion in the next three months alone.

Dark green bars show turnover is down from recent highs during Covid, but still above pre-Covid levels.

Figure: 6 Monthly turnover

Note “Net change in debt” is the difference between debt issued and debt due. This means that when positive it is part of issued debt and when negative it represents matured debt.

Treasury bills (

Much of this will be in bills, but the Treasury should be careful as the Bid to Cover ratio has fallen quite rapidly over the past few months, indicating a drop in market demand for short-term debt.

Figure: 7 Supply of treasury bills to hedge

This is concerning given the amount of short-term debt the Treasury continues to roll over each month. Of the $3,000,000 in total debt, $2.4,000,000 is in short-term notes, as shown below.

Figure: 8 Short Term Rollover

Treasury Notes (1-10 years)

The Treasury also saw a sharp decline in the bid-to-cover for 10-year debt, as shown below. It now stands at 2.4, the lowest level since August 2019. 2-year debt is still showing relatively healthy demand at 2.61 bid-to-cover. This is probably due to the narrow gap between the two instruments. Investors only get 28 additional basis points for 8 additional years of inflation risk.

Figure: 9 Submission to be covered over 2 years and 10 years

Although notes have been the preferred method of debt financing, it does not save the Treasury much time. As shown below, nearly $6.15 trillion will need to be rolled over by the end of 2024. This is exactly why the Fed and Treasury are hoping for a short inflation fight. A longer and harder fight would be devastating for the Treasury.

Figure: 10 Treasury Bill Rollover

Interest rate

The chart below shows the path of interest rates since 2000. The Treasury has benefited greatly from a steady rate cut over the past 20 years. The tide has clearly turned as interest rates have exploded higher than ever before. The current move has happened faster than in 2006 and 2017. This is why interest payments are rising so rapidly, not to mention the huge debt balance.

Chart: 11 Interest rates

Historical perspective

Although the total debt has now exceeded $30,000,000, not all of it poses a risk to the Treasury. There are over $7 billion in non-marketable securities that are debt securities that cannot be resold. The vast majority of non-negotiables are money the government owes itself. For example, Social Security holds over $2.8 trillion in nonmarketable US debt. This debt is risk free because all interest paid is the government itself. The risk will be when Social Security has to start selling that debt.

The remaining $23,000,000 is split into bills (

Figure: 12 Total outstanding debt

The chart below shows how the reprieve offered by non-tradable securities has been fully exhausted. Before the financial crisis, non-marketable debt accounted for more than 50% of the total. This number has fallen below 24%.

Figure: 13 Total outstanding debt

Historical analysis of debt issuances

As noted above, recent years have seen a lot of changes in debt structure. Even if the Treasury has extended the maturity of the debt, it no longer benefits from the free debt in non-negotiable securities. Additionally, debt is so large that even though short-term debt has decreased as a % of the total, it is still a massive aggregate number ($3.67T).

Figure: 14 Debt details over 20 years

It may take some time to digest all of the above data. Here are some main takeaways:

  • In a single year, bills went from 15.5% of the total to 12%
      • Bonds now account for 12.2% of total debt, the highest value according to available data
      • Notes represent 44.3% of total debt, almost double from 20 years ago
          • Average maturity increased from 2.85 years to 3.51 years
  • Average note interest rates are now 1.4%
      • This is slightly down from a year ago (1.51%) but up for 6 months (1.35%)
  • Annual interest on bonds fell from $2.4 billion 6 months ago to $20.3 billion today
      • It’s a massive move in 6 months and it’s just getting started

What this means for gold and silver

Buckle up! The Fed talks tough, but it tries to defy simple math. If the Fed gets aggressive with interest rates, the Treasury will see debt interest rates skyrocket. Even with the modest increase so far, annualized interest is up $40 billion and it’s just getting started. Since the Fed is no longer the biggest buyer in the market, who will absorb this new debt? Interest rates will be pushed up. This is why the rates explode higher. Is this the beginning of the debt spiral? The Treasury could spend $500 billion on debt service alone in a short time!

The Treasury has done everything to extend the maturity and obtain free loans for non-negotiable debt. Unfortunately, the time is up. Their attempt to extend the maturity of the debt is valiant but futile. Debt hasn’t been a problem for years due to low interest rates, QE and non-marketable debt. All those tricks have been played, this is where the math takes over. Either the Fed saves the Treasury by reinitiating QE, or the Treasury enters a spiral of debt. It’s not going to play out over several years…it’s something that’s happening right now that will drastically change the outlook for the budget deficit 18 months from now.

How will the Fed and the Treasury react to the new landscape? Will Powell let his friend Yellen drown in debt or save her? He did everything to give him a lead on how to extend the maturities and increase the cash balance, but that won’t go any further. He may be talking tough with QT, but his next move will be a direct bailout as he begins to monetize debt (QE) again. Be sure accordingly with the physical precious metals.

Data source:

Data updated: monthly on the fourth working day

Last update: May 2022

Interactive US debt charts and graphs are still available on the Exploring Finance dashboard:

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