The Treasury only added $6B of debt in December, allowing short-term debt to mature and replacing it with longer-term debt. This makes sense as long-term rates are below short-term rates with the inverted yield curve.
The Treasury started preparing for the debt ceiling back in October with the big surge into Non-Marketable debt of $260B. This is the release valve when the ceiling is hit. Expect it to be used in the coming months.
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
The Treasury added $1.8T in new debt during 2022. This would have been a new record if not for the spending splurge during Covid. Had the ceiling not been hit this month, it is likely 2022 would have overtaken the $1.9T in debt from 2021 and been second only to 2020.
Figure: 2 Year Over Year change in Debt
Although the Treasury let short-term debt roll off this month, the weighted average time to maturity fell just a bit from 6.18 to 6.17 years. It is still near record highs.
The weighted average interest rate continues to move up though, it increased from 1.92% to 2.01%. This is the first time the rate has exceeded 2% since March 2020. This means that the benefit to the Treasury of zero interest rates through 2020-2021 has been completely undone .
Figure: 3 Weighted Averages
The Fed continues to talk a tough game about battling inflation, but the situation for the Treasury is getting uglier each month. The spike in interest payments can be seen below. The chart shows marketable security and then a black line which is taken from the Treasury monthly statement. The black line is only through November and includes other interest expenses unrelated to marketable debt.
In December 2021, annualized interest on the debt was at $300B per year. A year later that number is now $480B and rising fast! Interest expense surged 60% in a single year.
Figure: 4 Net Interest Expense
The chart below uses the current debt data and rollover schedule combined with the Fed dot plot to forecast how interest expense will change going forward. It also assumes a “modest” $1.5T of new debt added each year. In a recession, it’s quite possible debt issuance could double!
Even under this baseline forecast, annualized interest expense should surpass $660B by June and $730B by December. Even with rates coming down slowly in 2024, interest expense continues climbing and reaches $840B in Dec 2024. That is less than 2 years away .
There is no way the Treasury can handle annual interest expenses over $800B. This will drive spending through the roof and create a debt spiral. So, either the Fed is bluffing or they are oblivious to some pretty simple math. Considering the number of PhDs employed by the Fed, we can rule out the simple math explanation and just assume they are just bluffing.
Figure: 5 Projected Net Interest Expense
The annualized interest is surging because so much debt needs to roll over at much higher rates. The chart below shows how much debt is rolling over (~$1T per month). Much of this is short-term debt, hence the steep drop-off in the light green bars, but each time the Fed raises rates, the impact on the Treasury is nearly immediate.
As the Fed slows rate hikes, the steepness of the interest expense curve will abate some as all the short-term debt is already refinanced at the higher rates. But longer-term debt will continue to need refinancing and new debt will continue to be added. This is what keeps driving interest expense up through 2024 even as rates come down.
Figure: 6 Monthly Rollover
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
The current debt ceiling saga has yet to play out, but things should come to a head rather quickly. The Treasury cash balance is back below $400B and the tricks with Non-Marketable debt usually only last a couple of months.
To become speaker McCarthy had to make some major concessions . The debt ceiling will surely be a major topic in the months ahead. Unfortunately, the Treasury may not have time to handle a prolonged battle.
Figure: 7 Treasury Cash Balance
Digging into the Debt
The table below summarizes the total debt outstanding. A few key takeaways:
On a monthly basis:
- 6-12 month debt was converted to much longer debt spanning 3-30 years
- “Other” debt was $48B and well above the 12-month average of $16B
- Bond issuance was below the 12-month average
On a TTM Basis:
- Bills were nearly flat on the year, dropping by $72.7B
- 2022 was only below 2021 by $67B
- Keep in mind that 2021 had the Biden stimulus in March, so 2022 was this high without new stimulus
Figure: 8 Recent Debt Breakdown
A Looming Recession
The yield curve continues to flash signs of recession. The spread between the 2-year and 10-year reached -84bps on Dec 7, recovered some at -43bps on Dec 28, before crashing back down and hitting -74bps on Jan 5. As shown below, the yield curve is far more inverted than the last three recessions.
Figure: 9 Tracking Yield Curve Inversion
Unfortunately, just as the Treasury will need to issue more debt, the bid-to-cover ratio for new Notes 7-10 years is near multi-year lows. This indicates sagging demand for Treasuries. There have been no 10-year auctions since mid-December, but the next auction should give insight into how much demand there is for long-term debt when short-term debt is paying much higher rates.
Figure: 10 2-year and 10-year bid to cover
Putting the picture together, the Treasury is facing exploding debt, surging interest costs, and shrinking demand for its debt. All this is happening right before an ugly debt ceiling battle. The Fed will not be able to sit on the sidelines long in this environment.
While total debt now exceeds $31T, not all of it poses a risk to the Treasury. There is $7.5T+ of Non-Marketable securities which are debt instruments that cannot be resold and the government typically owes itself (e.g., Social Security).
Figure: 11 Total Debt Outstanding
Unfortunately, the reprieve offered by Non-Marketable securities has been fairly limited in recent years, as the Treasury has been forced to rely more heavily on private markets. This has made Non-Marketable fall from over 50% of the debt to less than 25% of total debt outstanding.
Figure: 12 Total Debt Outstanding
Historical Debt Issuance Analysis
The table below breaks down the trends shown above with specific numbers.
Figure: 13 Debt Details over 20 years
It can take time to digest all the data above. Below are some main takeaways:
- Average interest rates on Bills have increased from 0.07% to 3.24% in 12 months
- This has increased annualized interest from $2.4B to $120B just on Bills
- Short-term rates still have another full percent until they are at the current rate. This will drive interest expense by another $37B even if the Fed just holds flat.
- The increased interest in Notes has been slower, rising 29bps over the same period
- Despite the relatively small move, the increase in dollars is almost $50B
- Every 25bps hike will cost the Treasury $60B after it works its way through the curve.
- Average interest rates on Bills have increased from 0.07% to 3.24% in 12 months
What it means for Gold and Silver
This is clearly an unsustainable situation. The Fed can keep talking tough but there is no way they can let this math play out. Any talk of elevated rates for a longer period should be immediately discounted. Rates are already too high for the Treasury.
That said, the Treasury does have more runway than almost any other entity. US debt is still in demand around the world so they can continue issuing debt and just deal with the pain of higher rates until the Fed reverses course. Private companies and households are not in the same position. Higher interest rates are crushing the housing market and pushing over-leveraged firms to the brink.
It is only a matter of time before something surfaces and it could cause major ripple effects. The Fed will have to step in to prevent contagion and prevent those ripples from turning into a tidal wave. When the Fed pivots sooner than they are currently forecasting, gold and silver will shoot higher. Smart money sees the writing on the wall and has been bidding up prices with a big start to the year.
Data Updated: Monthly on fourth business day
Last Updated: Dec 2022