As Debt Costs Rise, Treasury Plays Defense

 Today's Treasury market again produced only modest changes in rates. Yields on the secondary market and at auctions are closer than they have been at any point since the start of this fiscal year; as the right-most column in Table 1 indicates, the market yields for four maturity classes—3-year, 5-year, 10-year, and 20-year—are below their last auction yields:

Table 1

Source of raw data: U.S. Treasury

Over the past four weeks we have noted a trend in the composition of the U.S. debt, where more of it is held in short-term securities. Treasury bills, which mature in one year or less, on Monday represented an estimated 16.01 percent of total debt, compared to an estimated 15.07 percent on October 12. The share of bonds, with 20- and 30-year maturities, has remained almost exactly the same, while notes, maturing in 2-10 years, have declined from 67.14 percent to 66.25 percent. 

One option, though unlikely, is that this observed shift is due to the configuration of our model. During the time period mentioned, our model has expanded from covering 65.72 percent of all U.S. debt, to covering 66.44 percent. If this change had added short-term debt not previously covered, it would have been valid to explain the change in debt composition by a model anomaly. 

However, our model covers completely all outstanding debt with a maturity 10 years or less; due to shortages in Treasury-provided data, we only cover a portion of the outstanding stock of Treasury bonds. We expand coverage of the bond-maturity segment on a month-to-month basis. Therefore, if anything, our model is skewed to under-estimates the aforementioned trend toward shorter-maturity debt.

A more likely explanation of the shift in maturity composition is that the U.S. Treasury is selling more debt under short maturities to as a quick-fix response to the Federal Reserve's termination of its QE programs. In other words, the Treasury is playing defense in its management of the federal government's debt stock.

As of Thursday, November 10, total U.S. debt amounted to $31,252 billion. By November 1, the amount was $31,211.7 billion. That amount, in turn, was a 0.9 percent increase from October 1. 

Over the same period of time, the estimated annual interest-rate cost for said debt increased by 7.7 percent, in other words, more than eight times faster than the increase in debt. 

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We do not give investment advice. 

This blog provides analytical information solely for 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.