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by Peter Schiff, Schiff Gold:

The debt ceiling was raised in December and the Treasury responded immediately, adding $709 billion in debt over the month.

To be fair, $470 billion of this was non-marketable, as shown below.

Note: Non-Marketable consists almost entirely of debt the government owes to itself (e.g., debt owed to Social Security or public retirement)

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Figure: 1 Month Over Month change in Debt

Of the $470B in Non-Marketable, $261B was used to replenish the Federal Retirement Fund which is raided each time the Treasury uses extraordinary measures. Another $118B went to the Highway Trust Fund with the Disability Fund getting $76.5B. Most of this debt is interest-free, but it’s used in emergencies so that the government can issue debt to the public as shown in the chart above for November and August.

Regardless, this does not change the bigger picture shown below where the Treasury added $1.9T to the debt in 2021. This wasn’t quite the $4.5T in 2020, but it occurred during a year that saw record tax revenues.

Figure: 2 Year Over Year change in Debt

What happens if those tax revenues dry up? What happens if the economy goes into recession… maybe from the Fed getting aggressive with a taper. So far, the ability to taper has been mixed. The chart below shows why. What happened the last time the Fed started tightening? Annualized interest payments increased by $100B within 18 months. And don’t forget, that was $8T ago!

Figure: 3 Total Debt Outstanding

Digging into the Debt

The table below looks at the most recent month of debt issuance, compared to the previous month, and also the Trailing Twelve Month (TTM) average. More history is shown on the right comparing the last 3 TTM periods (the last 36 months). Some key takeaways:

  • The Treasury has actively been replacing short-term debt with medium-term debt to reduce interest rate risk
    • Nearly $1.2T in short term debt was replaced by longer maturities in 2021, but this effort has faded the last three months
    • Interestingly, in the last two months < 6 Months has been increasing, offsetting the maturity of 6-12 month
  • Notes are still getting longer in maturity
    • 1-3 year fell this month by $18B while 3-10 year increased almost $165B
    • Across all 2021, Notes increased nearly $2T
    • After issuing roughly $0 in 7-10 year during 2020, the Treasury issued $448B in 2021. This is still below the $551B in 2019.
  • Bond issuance also increased significantly, rising from $460B to $641B YoY

The Treasury actively reduced Bills outstanding for most of 2021; however, over the last three months, the total Bill outstanding has increased $55B. If the effort to reduce Bills has stopped and potentially reverses, it leaves $3.7T in debt highly susceptible to Fed rate hikes.

Figure: 4 Recent Debt Breakdown

Debt Rollover

Rolling over debt is using new debt to pay back the debt that is maturing. The chart below shows the amount of debt issued and matured going back 7 years. It also looks forward, seeing what is maturing in the future. As shown below, the majority of debt issued each month is actually rollover, with only a small percentage being new debt (red bar), which can even bring total debt down when more matures than is issued.

In December, the Treasury rolled over $1.34T. Before COVID, the Treasury was rolling over just under $1T a month, so it is still well above this figure.

Figure: 5 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

While it may look like the government is about to get relief with a lot of debt maturing in the coming months, most of the debt will be refinanced into short-term debt and the rolling will continue well above $1T.

T-Bills (< 1 year)

While demand for T-Bills may be well received by the market, it poses a risk to the Treasury. Each month almost 31% ($1.2T) is rolling over, and as the chart below shows nearly 100% rolls over within a six-month window. This means any Fed hike will be felt almost instantly in the Treasury Bill market. Each .25% rate hike will translate to $9.4B in additional annual interest payments within 6 months.

Said differently, if the Fed raises rates by 1% in 2022, the Treasury will owe an additional $37.6B a year in interest payments just on Bills.

Figure: 6 Short Term Rollover

Treasury Notes (1-10 years)

Although the Treasury talks about taking advantage of low-interest rates to lock in expenses, it’s easier said than done. The plot below shows the Bid to Cover for 2-year and 10-year debt. Unlike Bills which range between 3-3.5, Notes are closer to 2.5.

The Treasury cannot flood the market with Notes because there wouldn’t be enough demand and interest rates would be pushed up. Factor in the Fed leaving the market and the Bid to Cover would fall further, especially considering foreign governments are losing their appetite for Treasuries.

Figure: 7 2 year and 10-year bid to cover

Notes also present their own problem. While rates do get locked in, the Treasury really only buys relief for a couple of years. The chart below shows the annual rollover for Treasury Notes. As shown, the amount rolling over has picked up significantly in recent years.

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