US debt: annualized interest increases by more than $22 billion in a single month

by SchiffGold 0 0

The Treasury added $341 billion in debt in August. This is the largest increase in debt since January and more than 10 times higher than in July. Another major event was the increase in short-term debt. The Treasury raised bills by $210 billion, the largest increase since June 2020. It’s a move that runs counter to recent months when the Treasury has actively reduced short-term holdings.

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

The recent surge in debt issuance pushes total US debt to $30.9 billion, up $1.3 billion so far this year.

Figure: Change in debt over 2 years

The recent conversion of short-term debt to long-term debt can be seen below as the Treasury extended the average debt maturity to record highs. The current average maturity is 6.19 years, down from 5.76 just before Covid hit. The average maturity was 5.15 at the peak of debt issuance in 2020, which was predominantly short-term in nature.

Unfortunately, that hasn’t stopped debt interest from climbing. The Fed’s hike cycle took the weighted average interest rate from 1.32% to 1.64%. 32bps may not seem like much, but out of a balance of $30.9 billion, that comes out to $99 billion! Moreover, the the rate rose 9 basis points in the most recent month alone.

Figure: 3 weighted averages

The chart below shows the impact of rising interest rates. Interest on marketable debt hit a new all-time high of $388 billion. The rate of increase is even more worrying. In the last month alone, annualized interest has increased by $22 billion! This rate of increase is totally unsustainable for the US Treasury!

The black line shows interest as calculated by the federal budget due next week (below through July). This will include other interest charges beyond negotiable debt, such as the newly popular I-Bonds, which pay out interest in excess of 9%!

Figure: 4 Net interest expense

Treasury Notes (1-10 years)

Despite the lengthening of the maturity, the Treasury is not so well protected against a rapid rise in short-term rates. While the bills present the greatest immediate risk, the notes are relatively short-term with an average maturity of 3.49 years and represent 44.2% of the $31 billion balance. The rolling schedule can be viewed below. More than 6 billion dollars should be transferred by December 2024! Can you imagine the impact if the Fed has to keep rates high during this period? The Treasury could owe more than $150 billion more on this part of the debt alone.

Figure: 5 Treasury Bill Rollover

The yield curve

The Treasury still benefits from a fairly inverted yield curve. This helps lengthen the maturity of the debt because it becomes cheaper to borrow long-term rather than short-term. Although they failed to take advantage of this last month, with short-term debt seeing the largest increase of any instrument, the Treasury has certainly benefited over the past few months.

The yield curve remains inverted but is less so at the moment. At one point the reversal reached -48bps but has since returned to -17bps. This is one of the clearest signs that the US economy is in or heading for a recession. If a recession hits, budget deficits could explode quite quickly if tax revenues dry up.

Figure: 6 Yield Curve Inversion Tracking

Historical perspective

With total debt now approaching $31,000,000, not all of it poses a risk to the Treasury. There are over $7 billion in non-marketable securities which are debt securities that cannot be resold and which the government generally owes to itself (e.g. Social Security).

Figure: 7 Total outstanding debt

Unfortunately, the reprieve offered by non-marketable securities has been fully exhausted. Before the financial crisis, non-marketable debt accounted for more than 50% of the total. This number has fallen to 23.5%. In recent months, the Treasury has increased issuance of non-negotiables, but this has not been enough to make up for lost ground.

Figure: 8 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. Also, the debt is so large that even though the short-term debt has decreased as a % of the total, it is still a massive aggregate number ($3.7T).

Figure: 9 Debt details over 20 years

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

    • Annualized interest rose from $299 billion to $388 billion in 12 months
        • Over the same period, the average maturity increased from 5.9 to 6.19 years
        • Over 20 years, annualized interest more than doubled from $145 billion
    • The average interest rate on bonds and notes is 1.39% and 1.55%. If the Fed raises rates an additional 75 basis points to 3%, that means interest on both instruments will double on the rollover.
        • It will be catastrophic!

What this means for gold and silver

The massive increase in interest charges is the clearest reminder that Powell to have to have a quick fight against inflation. He can’t keep rates high for long or the Treasury could spiral into debt. Rates will soon come down. Even with the extended debt maturity, there is simply too much to sustain higher rates for long.

The Fed is clearly ready to risk recession to fight inflation. And why not? If inflation stays high and rates go up or even stay where they are, the US Treasury is toast. If the notes were to renew at 3-4% over the next 2 years, the total interest on the debt could easily exceed $750 billion. This would equate to additional spending of $450 billion over a three-year period. Interest becomes by far the largest item in the federal budget.

It can’t happen. The Fed needs to cut rates as soon as possible, but also needs inflation to be more subdued. They have an extremely short track and no margin for error. The fate of the dollar and the credibility of the US government hang in the balance. Either or both could fall in short order. Gold and silver will be the best hedge against either, or perhaps both scenarios.

Data source:

Data updated: monthly on the fourth working day

Last updated: August 2022

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

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