U.S. Fiscal Forecast: Weekly Update

This week saw the auction-yield cost of U.S. debt continue its crawl upward. The trend shows no signs of tapering off. Figure 1 reports the median yields at the latest auctions for the 4-, 8-, and 13-week bills; the time series for each represents the full amount of debt under respective maturity class: $234.5 billion under the 4-week, $391 billion under the 8-week, and $787.4 billion under the 13-week bill:

Figure 1

Source of raw data: TreasuryDirect.gov

The yields displayed in Figure 1 are the median yields at respective auctions. Those yields represent the marginal cost of debt under that maturity; when compared to the average yield for each security, we get a good idea of how quickly the cost of debt is rising, both within that security and—when aggregated—for the U.S. debt as a whole. 

The average yield per maturity in Figure 1 is well below the marginal yield, but it is nevertheless at or above three percent: 3.02 percent for the 4-week, 3.07 percent for the 8-week, and 2.96 percent for the 13-week. 

With the yield at the latest auction higher than the average yield, we can safely predict that the U.S. government is going to face rising debt costs for weeks and months to come. Every new auction replaced old, maturing debt with new debt, which is sold at a higher cost. 

Another way to look at the rising cost of the debt is to look at the payout—in other words the actual dollars of interest payments—that the U.S. Treasury has to make on an annualized basis. In other words, these are estimates of what the interest cost would be, should current auction yields and accepted ratios determine the cost over the coming fiscal year. 

For these three bills, the payouts have increased as follows, over the periods of time displayed in Figure 1:

• 65.6 percent for the 4-week bill;
• 56.1 percent for the 8-week bill; and
• 35.8 percent for the 13-week bill.

Again, these numbers do not reflect the actual fiscal cost, but tell us two things:

a) how much more expensive it is to renew debt under each maturity; and

b) what the long term trend is in said cost. 

Let us take a broader look at this trend, with some different but comparable numbers. 

The 7-year note auction, expected on October 28, will theoretically have to replace $29 billion worth of expiring debt from the equation exactly seven years ago. That auction resulted in a median yield of 1.845 percent, which means that the annual cost for honoring that $29-billion pile of debt has been just a hair over $535 million.

Suppose the Treasury were to simply replace those $29 billion of expiring 7-year notes with new ones, worth exactly the same. If it had to pay the latest market yield of 4.26 percent, the annual cost on this particular slice of U.S. debt would increase by almost 131 percent to $1.24 billion.

A similar estimate for the next 10-year auction suggests an annual interest cost of $924 million, a 236-percent increase from $391 million. 

Again, each auction only replaces a small portion of the debt, which means that if these predictions turn out to be accurate, in the short run they have only a marginal effect on the actual, current debt cost. However, they are powerful as means of predicting the debt cost over a longer period of time. Currently, an estimated 15 percent of the U.S. debt matures in one year or less, while an estimated 34 percent mature in 7-10 years (split equally between the two notes). 

Suppose, hypothetically, that the Treasury replaces the 15-percent that matures in no more than one year, and that on average they have to pay $1.50 in yield for every $1.00 in the debt they replace. All other things equal this increases the cost of the U.S. debt by 7.5 percent. 

Based on our current estimates of what the U.S. debt costs taxpayers, this increase alone will cost taxpayers another $45 billion per year. If the debt cost on this short-maturity segment of the debt were to double over one year, the cost increase would be $90 billion. And this is on just the 15 percent of the debt that matures in one year or less.

Looking at the debt as a whole, the cost trend is no less worrying. The Treasury auctions that have taken place thus far in October, have raised the weighted-average interest cost on the federal debt from 1.87 percent to 1.94 percent. Calculated on a $31.2 trillion debt, this means a debt-cost difference of $25.7 billion in one month alone.

Again, these numbers are annualized indicators for the whole fiscal year, allowing us to predict what is going to happen to the debt cost over the next year. At some point, this cost trend will become worrisome enough to investors, that the rise in yields becomes a self-propelling trend. When that happens, we have a fiscal crisis on our hands. 

Let us make clear that we are not on the threshold of a fiscal crisis. Not yet. The trends, however, in both Treasury yields and tender-accept ratios at auctions, are such that unless Congress takes appropriate fiscal measures to the contrary, we believe a crisis is possible in the next two years. 

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We do not give investment advice. 

This blog provides analytical information solely the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.