US Debt Maturity Profile, AKA When do we have to pay for all this?

I’ll preface the body of this post with a reminder that the US debt downgrade by S&P didn’t come until after the collection of this data, and that our interest rates have fallen in the aftermath of that downgrade. This is important, because if you took that event in isolation, it would appear as if the US debt market started to take a turn for the worse, but rapidly recovered when the S&P downgrade instantly restored everyone’s faith in the credit of the US government. Of course this would fit with the absurdity that is reality: it wasn’t too long ago that S&P maintained a AAA rating on a particular set of bonds until after they were defaulted on. S&P: quality contrarian indicator?

For July, the near-term roll risk hasn’t increased substantially. The longer maturities, particularly 6 and 8 years, have seen increased issuance. This is because the 7-year issuance has increased in the recent past and the 10 year increased a bit over a year ago only to have the rate of issuance maintained. As an aside, if we didn’t have the benefit of previous charts, we wouldn’t be able to distinguish between this scenario and one where some non-QE Fed operations were used to significantly alter the maturity profile (double-aside: QE didn’t alter the profile because the debt owned by the Fed is kept on this chart).

Our average interest rate improved on a year-over-year basis, but showed some substantial weakness on a month-to-month basis. We know that this has so far proven to be a temporary blip.

(July treasury data here)

US Debt Maturity Profile, AKA When do we have to pay for all of this?

I was reminded by someone that I was late in producing this chart. In a couple weeks we will have July’s data.

As has been the case for some time, our roll risk is increasing. Note that we’ve managed to shift quite a bit of new debt to longer durations. This has also been the case for some time.

Our average interest rate shows improvement both month-over-month and year-over-year. Let’s see how July and August stack up. Remember, we’ve been holding debt off the market. We’ve not been contributing to certain things that we’ve promised to catch up on when the debt ceiling gets raised. At that point, we will probably start issuing a bit more debt. Some of this was actually eaten up by higher than expected revenues last month, but there’s still some overhang.

As of this chart, the bull market in treasuries has not completed.

(June treasury data here)

US Debt Maturity Profile, AKA When do we have to pay for all of this?

It’s rare that someone actually asks me to produce a chart and comment on it, so I’m all over this for my new best friend in the whole world, Bo840.

Roll risk is increasing in the US. That area I circled in red is 3.8 trillion dollars of roll risk we’re looking at. Since these are marketable securities, this mostly ignores our biggest must-buy customer, Social Security. But since Social Security is now a net seller of treasury debt, I’m not sure that actually matters. Many mutual funds and the like are also required to invest in treasuries, so they still count as buyers for this bit (provided we don’t have a problem with a large demographic group retiring or other people cashing out their retirement early due to hardship… right?). But as far as risk is concerned, much of this comes down to currency flows. There is risk that other nations will become net sellers of treasuries.

The area I’ve circled in orange is additional roll risk from the last year. This is about 288 billion dollars.

Finally, the area I’ve circled in green shows a lot of new debt issued at longer maturities. If things blow up, this is somebody else’s problem (tell your kids you love them).

What isn’t accounted for in this graph is how much of each of these durations is held by the Federal Reserve. They’ve been buying treasuries of various durations in an effort to control interest rates. By doing so, they’ve pumped money into the banking system. The banks, in turn, have bought things like oil, cotton, and corn futures. This increases input costs for the economy, which results in a mix of lower margins and higher prices for the things you need. Since the Fed doesn’t want grandma to eat catfood, sustained increases in the costs of commodities limits Fed purchases of treasuries.

Congress tends to blame the banks for putting the money in things like oil, cotton, and corn and says, “Stop being dirty speculators! Put the money to work someplace useful!” The banks reply, “Like what? The LinkedIn IPO?” The truth is that the banks do not want to be sitting on cash, but don’t see many other profitable investments right now. And when money is flowing freely into banks, banks tend to shove it into places that reflect inflation expectations.

If the Fed’s ability to buy treasuries is limited by rising prices, and if big buyers of treasuries start looking elsewhere to park their dollars (despite my sarcasm and despite the scare headlines you’ve undoubtedly seen, this is still a pretty big if), we may be at a turning point.

Some people believe that the high in treasury prices (low in interest rates) is in. And while our average interest rate has improved year over year, it didn’t change vs last month. Personally, I think there’s room for another rally or two in treasuries. That said, I don’t think the risk/reward ratio looks good for treasuries right now. I think it is quite likely that interest rates will be higher in 3 years and that the real rate of return on the current 10 year will prove to be negative.

Nobody really expects this to end well for the US. However, there’s a huge difference between treasuries crashing down to Earth tomorrow and treasuries crashing ten years from now. There’s an even bigger difference between a treasury crash and a slow, steady increase in interest rates. But even without a crash, we currently spend $400 billion a year on interest payments for the national debt. As interest rates rise, the amount we have to grow to prevent ourselves from being overwhelmed grows. If there are downside risks to the economy, the consequences of these risks becomes magnified.

Since the bottoming of the recession to now, GDP has grown by $631.9 billion (In that time, we’ve added $3.2 trillion to the national debt). If interest rates on our short-term debt rose to 5%, we’d obliterate those gains. And just for comparison, from our previous peak to now, GDP has grown by $78 billion (in that time, we’ve added $5.2 trillion to the national debt). If the tide is turning for treasuries, servicing our debt is going to become a big problem.

(May treasury data here)

US Debt Maturity Profile, AKA When do we have to pay for all of this?

I thought this might be interesting given that we may have just hit our statutory debt limit.

By one measure, the Fed is winning. As has been the case for a while, our average interest rate continues to drop. Unfortunately, there’s that other measure that continues to cause concern. Our roll-risk is increasing again. So much for pushing out debt to longer maturities.

With the possible exception of a global panic on Monday leading to Armageddon, the rest of the world continues to be scarier than US Treasuries.

(April treasury data here)

US Debt Maturity Profile, AKA When do we have to pay for all of this?

The Fed isn’t playing the game as well as they were before even though they’ve got much bigger weapons at their disposal. As before, our average interest rate continues to drop. Unfortunately, the Fed no longer appears to be able to reduce our roll risk. In particular, the roll-risk for the next two years has risen substantially.

Those first two years are the most susceptible to violent increases if the market decides to turn on US sovereign debt. As we’ve seen in Europe, bond yields can go from perfectly normal to crisis in under three months. Portugal went from multi-year lows to all-time record highs in under 6 months. Bond vigilantes are ninjas (or back-stabbing cowards). You don’t get a warning before they murder you.

Fortunately, everywhere else in the world looks poised to fall apart before the US treasury market.

(February treasury data here)