U.S. Fiscal Forecast Weekly Update

 Here is our summary of this week's activities in the market for U.S. debt:

https://www.patreon.com/posts/fiscal-forecast-76525492

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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. 

Quiet Day for Treasury Auctions

On Thursday, the Federal Reserve sold debt under three maturities. The 4- and 8-week auctions pulled in $45.94 billion each, with the 4-week attracting $119.58 billion in tender offers from investors, and the 8-week getting $109.34 billion in offers. 

The tender-to-accept ratio for the 4-week bill was 2.6; last week's 2.83 was the first in four weeks below 3 in four weeks. The 8-week also attracted a lower tender volume given the debt sold: the T/A stopped at 2.38, down from a top of 2.88 only four weeks ago.

The 4-week yield of 3.65 was on par with the three last auctions, but the 8-week came with a notable rise. Its 4.14 percent median yield was a leap up from 3.88 last week and a return to 4+ percent yield on this maturity class. 

Both these auctions lowered the total debt cost for the U.S. government, in both cases thanks to the Treasury selling about $10.6 billion less under each maturity, than the maturing batches. The total decline in the debt cost was $396 million annualized.

The Treasury also sold $35 million worth of 7-year notes. At a T/A of 2.45, investors tendered $85.87 billion and earned a 3.859 percent median interest rate. This auction replaced $29 worth of maturing 7-year notes, on which the median interest rate was 2.115 percent. As a result, this auction increased the Treasury's debt cost by $737 million. Subtracting the reduction from the other two auctions, the net increase was an annualized $341 million.

Secondary market rates stood still for the most part, the big exception being the 4-week bond which jumped from 3.86 percent yesterday to 4.04 percent today. The 8-week also ticked up, albeit marginally, from 4.33 to 4.39. All other moves were minor. 

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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. 

Treasury Yield Curve Remains Inverted

The Treasury auctions on Wednesday sold 17-week bills and 5-year notes. 

The 17-week accepted $33.69 billion of $95.76 billion tendered. The T/A of 2.84 was a hair lower than the 2.95 from last week and 2.91 from the week before. The median yield of 4.48 was the highest on any 17-week auction to date. Since the 17-week bill was first auctioned eleven weeks ago, there was no batch retired at today's auction.

The 5-year auction sold $43 billion at 3.905 percent median yield. With $105.39 billion tendered, this auction produced a T/A of 2.46. It is the second highest tender-accept ratio in 29 months. The yield is in line with the three previous auctions, which all hovered around the four-percent mark.

By retiring $38.4 billion, today's 5-year auction only slightly increased the debt under this maturity class. The yield on the matured batch was 2.19 percent; given the 3.905 percent at today's auction, the annualized cost of the U.S. debt increased by $838 million.

Since the 17-week auction did not retire any debt, its entire $1.509 billion added to the debt cost. In total, today's auctions raised the expected, annualized debt cost by $2.347 billlion.

So far this week, the debt cost has gone up by $7.407 billion.

The estimated, average interest rate on the U.S. debt is at this point 2.2 percent. This is up from 1.87 percent at the start of this fiscal year.

Secondary-market yields have moved recently in the direction of higher rates. Yields on shorter maturities remain elevated, while there is a weak but steady trend of rising rates on longer maturities. Specifically, the 20-year bond sold at 4.13 percent today, compared to 3.93 percent a week ago and 3.74 percent two weeks ago. 

The yield curve remains inverted, but has flattened somewhat:

Figure 1

Source: U.S. Treasury

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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. 

Treasury Auctions Send Debt Cost Shock to Congress

There were no auctions on Monday, nor was there any secondary-market trade. However, on Tuesday the Treasury sold debt under four maturity classes: 13-week, 26-week, and 1-year bills, and 2-year notes. 

Tuesday's auctions sold a total of $192.81 billion in debt, distributed as follows:

• 13-week: $61.15 billion, which tendered $135.57 billion for a T/A=2.22;
• 26-week: $50.96 billion, which tendered $121.32 billion for a T/A=2.38;
• 52-week: $38.5 billion, which tendered $114.81 billion for a T/A=2.98; and
• 2-year: $42 billion, which tendered $113.96 billion for a T/A=2.71.

The median yield was as follows, with the maturing batch in parentheses, followed by last auction:

• 13-week: 4.255 (3.22) 4.2;
• 26-week: 4.52 (2.45) 4.5;
• 52-week: 4.5 (0.37) 4.52; and
• 2-year: 4.317 (0.11) 4.46.

Especially the last three auctions illustrate the debt cost rollover problem. The 2-year auction sold a smaller amount of debt than the maturing batch, $42 billion compared to $66.8 billion, yet the annualized cost of the yield on this new batch is $1.74 billion higher than the maturing one. This is, of course, exclusively attributable to the sharp rise in interest at this auction.

The 52-week auction raised the annualized debt cost by $1.592 billion. Since the new debt sold was almost equal to the maturing batch—only $400 million more—this significant rise in the debt cost stems entirely from the yield rise.

Even the 26-week auction increased the annualized debt cost by more than $1 billion. The maturing batch of $49.6 billion was replaced by a batch of $50.96 billion; with an interest rise from 2.45 to 4.52 percent, the debt cost rose by an annualized $1.088 billion.

Notably, even the 13-week auction contributed a higher debt cost. The Treasury sold $61.15 billion to replace $60.9 billion, with the yield rising from 3.22 percent to 4.255 percent. The fallout was $641 million in higher annualized debt cost.

All in all, today's Treasury auctions sent Congress a bill for an extra $5.06 billion in higher annualized debt cost.

By reducing the debt under the two longer maturity classes and slightly increasing it under the shorter two, the Treasury followed its already-visible policy of slightly shifting debt over in the direction of shorter maturities. As of today, Treasury bills with a maturity up to 52 weeks, account for an estimated 16.47 percent of the U.S. debt. Notes, which mature in 2-10 years, are still the backbone of the debt, but their share is now down to 65.7 percent; it was 67.1 percent in mid-October. 

The 20- and 30-year bonds make up the remaining 17.83 percent of the debt. 

Due to the rollover effect under the longer maturities auctioned today, the estimated average interest rate on the U.S. debt rose from 2.17 percent to 2.2 percent. On Monday we will publish another dynamic estimate of the total cost of the U.S. debt for this fiscal year; our last estimate, from the turn of the month, suggested a cost in excess of $1 trillion.

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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. 

U.S. Fiscal Forecast Weekly Update

 Our weekly round-up of all things fiscal in America:

https://www.patreon.com/posts/fiscal-forecast-76262382

Merry Christmas!

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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. 

Auctions Lower Debt Cost

The Thursday auctions sold a total of $92.44 billion, divided equally between the 4- and 8-week bills. These auctions replaced $113.6 billion worth of maturing debt under these two maturities. 

For the first time since the start of this fiscal year, a Treasury auction actually lowered the cost of the U.S. debt. The maturing batches carried a total, annualized debt cost of $4.362 billion. The newly sold batches cost $3.411 billion, again annualized. 

This reduction in the debt cost is divided between a smaller debt amount sold—a total reduction of $21.16 billion—and a lower yield for the 4-week bills. These shortest-maturity Treasury securities sold at a median yield of 3.5 percent, compared to 3.9 percent for the maturing batch.

The yield climbed marginally on the 8-week bills, from 3.78 percent for the maturing batch to 3.88 percent. However, the reduction in active debt under this maturity class outweighed the marginal yield increase.

Both auctions saw a drop in the tender-to-accept ratio. The 4-week attracted $130.86 billion for a T/A of 2.83, the first below 3 in five weeks. Investors tendered $122.01 billion for the 8-week, resulting in a T/A of 2.64. This is the lowest it has been in six weeks.

As of December 21st, the total U.S. debt stock amounted to $31,319.54 billion. It has been steady just above $31.3 trillion since mid-November. We anticipate a steady rise to begin in the first quarter of the new year, as economic activity commonly declines after the holiday-spending season. 

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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. 

Auctions Confirm Interest Rate Stability

The Treasury sold a total of $45.89 billion in debt on Wednesday, of which $33.89 billion consisted of 17-week bills. The accepted amount was identical to last week's auction, with investment tenders increasing marginally from $98.56 billion last week to $99.89 billion. This pushed the T/A up from 2.91 to 2.95, the highest in four weeks. 

The 17-week auction sold the debt at a median yield of 4.37 percent, well in line with the five most recent auctions. 

At the 20-year auction, the Treasury sold $12 billion against $32.18 billion in tender offers, raising the T/A ratio from last week's 2.48 to 2.68. The amount sold was identical to the auction three weeks ago, the last time the Treasury sold 19-year, 11-month bonds under this maturity class. The median yield of 3.899 percent is yet another small decline for this maturity class: last week's auction sold at 4.01 percent, and the week before that at 4.319 percent. 

Since the 17-week is new, having existed only for ten weeks, and there is not enough historic data from the Treasury on the 20-year bond, we cannot calculate the rollover cost on the debt sold today. However, given that the interest rates in both cases kept their maturity classes at or just below four percent, with only a weak downward trend for the 20-year, it is fair to say that auction yields remain steady in the neighborhood of four percent. 

The same is true for the secondary market, where the inverted yield curve remains in place. The 4-week bill currently pays 3.9 percent, while every maturity from eight weeks to three years comes with yields in the 4-4.67 percent bracket. The 5-30 year maturities pay less than four percent, although there is a trend of slowly rising rates here. Here is a comparison of today's yields with where they were a week ago:

Table 1

Source: U.S. Treasury

The estimated average cost of the U.S. debt remains at 2.17 percent.

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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. 

Treasury Auctions Affirm Yield Stability

Monday's Treasury auctions sold $55.84 billion of debt under the 13-week maturity. Attracting $140.36 billion in tender offers, the auction produced a T/A of 2.51. This ratio is a little bit higher than most of the past 13 weekly auctions, with only two producing a higher T/A.

The median yield of 4.2 percent is almost identical to the yield from the past three auctions. It was 0.99 percentage points higher than on the maturing batch of $55.8 billion. 

In addition to the 13-week, the Treasury sold $46.53 billion worth of 26-week bills.Tendering $130.02 billion, this auction came out with the highest 26-week T/A in five weeks. 

This auction produced a median yield of 4.5 percent, well in line with the past five weekly auctions. Here, though, the new yield exceeded the yield of the maturing batch by a higher margin than for the 13-week. The outgoing 26-week bills were worth $43.9 billion and yielded 2.285 percent. 

The annualized debt cost increase at the 26-week auction was $1.091 billion. The 13-week raised the annualized debt cost by $554 million. 

As of Monday, the estimated average interest rate on the U.S. government debt is 2.17 percent. At the beginning of this fiscal year, on October 1, that rate was 1.87 percent. 

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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. 

U.S. Fiscal Forecast Weekly Update

 Welcome to our weekly update, where we discuss the good news on inflation, and solidity of the CPI, and the rising cost of the U.S. debt:

https://www.patreon.com/posts/weekly-update-76000677

Have a good weekend!

--

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. 

Treasury Sells Less Short-Term Debt

Thursday Treasury auctions on 4- and 8-week bills sold $46.2 billion under each maturity, for a total of $93.2 billion worth of debt. The 4-week tendered $143.3 billion, while the $8-week tendered 123.6 billion.

The two bills exhibit different T/A ratios, with the 4-week at an elevated 3.1—the third week in a row above 3.00—and the 8-week at 2.67, the lowest in four weeks. 

Median yield was stable for both maturities. The 4-week sold at 3.62 percent, the second week in a row with declining yield (3.645 last week, 3.9 the week before that). The 8-week yield did not decline, but stayed virtually unchanged: this week's 3.995 percent was well in line with 3.91 from last week and 4.05 percent from the week before. 

Both these debt auctions replaced significantly larger, maturing batches. The maturing 4-week was worth $66.9 billion; the 8-week replaced $52.2 billion. In other words, the Treasury chose not to replace 22.4 percent of the maturing debt.

There were only marginal changes in secondary-market yield. The inverted yield curve remains solidly in place. 

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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. 

Treasury Market Maintains Inverted Yield Curve

 In its auction on Wednesday, the Treasury sold $33.89 billion worth of 17-week bills. Tendering $98.56 billion, investors offered $2.91 per $1.00 accepted. At a median yield of 4.4 percent, this auction was well in line with the three last auctions, which averaged 4.375 percent.

Since it has only been nine weeks since the Treasury started selling 17-week bills, this batch was a 100 percent net addition to the Treasury's debt portfolio. As such, it raised the average interest rate on U.S. debt from 2.15 percent to 2.16 percent. If this was the actual cost of the current total debt of $31,304.15 billion (Dec.13), the Treasury would have to pay $676.6 billion in debt cost for this fiscal year. This estimate assumes that the debt does not grow one penny above where it stands currently.

The secondary market for Treasury securities maintains the inverted yield curve:

Figure 1

Source of raw data: U.S. Treasury

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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. 

30-Year Bond Rate Falls Sharply

 At Tuesday's auction, the Treasury sold $18 billion worth of 30-year bonds. The median yield fell sharply to 3.43 percent from last month's 4.00 percent. With $40.74 billion, the T/A ratio came out to 2.26, largely on par with recent 30-year auctions. However, it is higher than historic auctions under this maturity: the oldest records consistently reported by the Treasury come with a T/A ratio around 1.7.

Overall, the T/A has been rising in recent years for 30-year bond auctions. Given the high interest rates that the Treasury has had to agree to at all auctions in recent months, it would have been good debt-management policy to put more 30-year bonds up for sale this time. The 3.43 percent at today's auction is the lowest rate since August, when a similar bond went for 3.019 percent. 

A technical note: the 30-year is sold in revolving cycles of three: the bona-fide 30-year; the 29-year, 10-month; and the 29-year, 11-month. Today's auction sold the last type. The Treasury tends to push a larger amount of debt when the 30-year proper is up for auction. However, there is no cyclical pattern following the three types of 30-year in terms of yield. This is another reason why it would have been reasonable for the Treasury to expand its debt sales today.

The yield for this maturity class closely follows the secondary market. At the time of the auction in November, the 30-year sold for approximately 4 percent in the secondary market; today, that same yield stands at 3.53 percent.  

Total U.S. debt stood at $31,317.68 billion on December 12. The estimated average interest rate is 2.15 percent. The model that provides this estimate is based on two thirds of the 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. 

Debt Rollover Sharply Raises Debt Cost

It was a big day for Treasury auctions on Monday.  

• 13-week bill: $140.36 billion tendered, $58.7 billion accepted, T/A=2.39; median yield 4.19 percent;
• 26-week bill: $123.73 billion tendered, $48.9 billion accepted, T/A=2.53; median yield 4.56 percent;
• 3-year note: $102.06 billion tendered, $40 billion accepted, T/A=2.55; median yield 4.03 percent;
• 10-year note: $74 billion tendered, $32 billion accepted, T/A=2.31; median yield 3.535 percent.

All in all, the Treasury sold $179.8 billion in new debt. These new securities replaced $164.4 billion in maturing debt.

The yields increased across the board: 

• On the 10-year, from 1.634 percent to 3.535 percent;
• On the 3-year, from 1.6 percent to 4.03 percent;
• On the 6-month, from 2.13 percent to 4.56 percent; and
• On the 3-month, from 3.03 percent to 4.19 percent.

As a result, the annualized increase in the debt cost amounts to $3.91 billion; this number is valid under the assumption that the 3- and 6-month bills are rolled over at future auctions for the same amount of debt and at the same median yield.

Adjusted for maturities, the rise in the debt cost stands at $2.833 billion.

Either way, today's auctions illustrate the powerful effect on the debt cost from debt rollover. It is worth noting that the debt cost rose by this much despite the fact that auction yields actually fell for three of the maturity classes:

• For the 10-year, from 4.044 percent last month and 3.85 percent two months ago, to 3.535;
• For the 3-year, from 4.54 percent last month and 4.24 percent two months ago, to 4.03; and
• For the 3-month, from 4.205 percent last week and 4.22 percent two weeks ago, to 4.19.

The only exception was the 6-month, where the median yield last week and two weeks ago was, respectively, 4.49 percent and 4.5 percent. This week's auction landed at 4.56 percent. 

Due to the rollover effect, the average estimated interest rate on the U.S. debt rose today, from 2.14 percent last Friday to 2.15 percent.

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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. 

U.S. Fiscal Forecast Weekly Update

This week we saw a solidification of the inverted yield curve for Treasury securities. While often interpreted as a sign of a recession, it is important to note that not all inverted yield curves have been followed by a recession. 

So far, there are no clear signs of a recession in the U.S. economy. To begin with, private-sector employment is still growing at healthy rates:

Figure 1

Source: Bureau of Labor Statistics

The average year-to-year growth rate in 2016-2019 was 1.73 percent. The number for November this year is 3.42 percent, which means that the growth in private-sector employment could fall by half, and all other things equal it would still not signal a recession. 

Over now to the two main indicators behind economic growth: private consumption and fixed capital formation (business investments). Again reported as year-to-year growth rates, but this time quarterly, the former is still growing at a respectable rate while the latter declined in Q3:

Figure 2

Source: Bureau of Economic Analysis 

Consumer spending increased by an inflation-adjusted 2.4 percent in Q3. The average for 2016-2019 was 2.43 percent, which means that American consumers have now returned their outlays to a relatively normal trajectory, despite high inflation. 

• The capital-formation number is more worrisome. As Figure 2 suggests, a dip in fixed investments precipitates a recession. However, when we disaggregate this number, things look a bit different:
• There is a decline in residential investments, i.e., home construction;

There is also a decline in investments in structures for businesses, such as offices, warehouses, manufacturing facilities;

At the same time, investments by businesses in equipment and intellectual property products, IPPs, are still growing. Their growth numbers are actually a bit higher than they were in 2016-2019, again adjusted for inflation. 

So long as businesses are increasing their purchases of equipment and IPPs, it means they are still expanding their operations. This is consistent with the observation that private-sector employment is growing at relatively high rate. 

There is one more reason not to predict a recession. In November, the Producer Price Index inflation fell to 8.2 percent, confirming that America is on the far side of a two-year inflation episode:

Figure 3

Source of raw data: Bureau of Labor Statistics

In short: there are no immediate signs of a recession in the U.S. economy.

The sharp decline in producer-price inflation will translate into lower consumer-price inflation, albeit more slowly. 

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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. 

U.S. Debt Cost Bomb in One Table

On Thursday the Treasury sold $46.5 billion in 4-week bills. The auction attracted $144.9 billion in tender offers, which pushed the T/A down from last week's 3.37 to 3.12. The median yield also fell, from 3.9 percent in in the last two weeks to 3.646 percent. 

The 4-week bill is now close to the point where the newly auctioned batch of debt yields the same as the maturing batch. This week's maturing batch of $67.2 billion paid 3.53 percent. 

The other auction today sold $46.5 billion worth of 8-week bills. At $133.9 billion, investors tendered $2.88 per $1 of debt accepted (sold) by the Treasury. Unlike the 4-week, this meant a rising T/A over last week's 2.72. It is the highest T/A of any active 8-week batch. 

The yield on the 8-week came in at 3.91 percent, returning this maturity below 4 percent (4.05 last week, 4.08 the week before). The maturing batch of $52.2 billion yielded 3.4 percent.

As of December 8, the average yield on U.S. debt, by maturity, is as follows:

Table 1

Source of raw data: U.S.Treasury

Taken together, the two columns in Table 1 tell us that an estimated 49 percent of the debt, spanning maturities from two to seven years, currently costs the Treasury less than two percent per year. Assuming that market interest rates remain in the 4-percent vicinity for the foreseeable future, the rollover effect on rising debt costs will last for multiple fiscal years (as only part of the debt rolls over each year).

Currently, the estimated average interest rate on the U.S. debt is 2.14 percent. 

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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. 

Treasury Yields Fall Across the Board

Treasury yields fell across the maturity spectrum on Wednesday:

Table 1

Source: U.S. Treasury 

These drops in secondary-market yields compounds a trend we have been pointing to since the end of November, namely that interest rates have reached a top, at least for now. 

Adding to this impression is the median yield from Wednesday's 17-week bill auction: at 4.35 percent, it was the lowest yield for this maturity class in four weeks. The auction sold $34.1 billion worth of debt, which attracted $89 billion in tender, for a T/A of 2.61.

Notably, the T/A is the lowest on record since the 17-week bill was first auctioned eight weeks ago. Last week's T/A was 3.05, in turn a drop from the 3.17 a week earlier. 

A decline in the Tender-to-Accept ratio suggests a weaker investor interest in the debt offered. If this lower interest is due to pessimism among investors, it will force the Treasury to raise the yield in order to sell the debt. As mentioned, that was not the case here, suggesting that investors bought up the offered 17-week bills in short order, and with confidence.

As of December 6, total U.S. debt stood at $31,338.55 billion. According to our model, the average interest rate on this debt is 2.14 percent. The debt is spread as follows (numbers from October 12 in parentheses):

Bills, maturity from 4 weeks to 1 year: 16.36 (15.70) percent;

Notes, maturity from 2 to 10 years: 65.92 (66.57) percent;

Bonds, maturity of 20 or 30 years: 17.73 (17.72) percent. 

Given that the United States currently operates with an inverted yield curve, it would be rational for the Treasury to reconfigure its debt portfolio from short to long maturities. For every $1 trillion that is moved from 4.5-percent bills to 3.5-percent bonds, the Treasury saves $10 billion annually. Per our latest debt-cost forecast, a transition of $5 trillion of debt that lowers the yield by one percentage point, would be enough to keep the debt cost from passing the $1 trillion mark.

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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. 

Inverted Yield Curve A Hint of High Long-Term Rates

There was no Treasury auction on Tuesday. Secondary markets reinforced the inverted yield curve:

Figure 1

Source of raw data: U.S. Treasury

There has been a notable shift in yields in recent days. the period November 25-30 marked a high point for mos Treasury bills: the 4-week (4.16 percent), 8-week (4.33), 13-week (4.41), 17-week (4.55), 1-year (4.78). The 6-month bill paid 4.62-4.72 percent in that time frame, but stopped at 4.74 percent on Tuesday. 

These bill yields marked the high point of the recent rise. That is not the case with Treasury notes and bonds, the yields of which peaked in the first week of November. 

While these peaks seem to be permanently in the rearview mirror, this is not a reason to expect that Treasury yields will continue to come down. If the lower long-term yields are any indication, the market is going to stabilize over time around 3.75-4 percent. 

As of Monday December 5, total U.S. debt amounts to $31,353.8 billion. Our estimate of the average interest rate on this debt is 2.14 percent.

From November 1 to December 1, total debt increased 0.49 percent. This is down from 0.91 percent for the month of October. The average yield cost on total U.S. debt increased by 6.95 percent in November, compared to 7.66 percent in October.

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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. 

Debt Composition Trends to Shorter Maturities

The Treasury auctions on Monday sold $58.6 billion worth of 13-week bills and $48.8 billion under the 26-week maturity. The 13-week attracted an even $149 billion in tender, for a T/A ratio of 2.54. This ratio is the highest in five weeks, when it was also 2.54; it has been 12 weeks since the T/A was higher. 

A high T/A is good for the Treasury, as it facilitates the sale of debt. 

At the 26-week auction, investors tendered $119.4 billion, resulting in a 2.45 T/A. This is the lowest in seven weeks.

Both auctions produced a decline in the median yield:

• 13-week: from 4.22 percent last week to 4.205 percent this week;
• 26-week: from 4.5 percent to 4.49 percent.

The maturing batches in both auctions both came with lower yields. The annualized increase in debt cost for the 13-week bill was $747 million; the 26-week auction added $1.41 billion. In total, the annualized debt cost increased by $2.157 billion.

Despite the fact that median yields on the auctions were lower (albeit marginally for the 26-week), the estimated average interest rate on the U.S. debt for FY2023 is now 2.14 percent. At the beginning of the fiscal year, it was 1.87 percent. 

As of today, an estimated 16.35 percent of the U.S. debt consists of bills, i.e., Treasury securities with a maturity of one year or less. An estimated 65.92 percent is notes, ranging from two to ten years in maturity. Bonds account for an estimated 17.73 percent. 

On October 12, the estimated shares were 15.08% for bills, 67.14 percent for notes, and 17.79 percent for bonds. This indicates a slow drift in the debt composition toward short maturities. 

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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.

U.S. Fiscal Forecast Weekly Update

The biggest news this week—and last, since there was no update then—is that the U.S. Treasury market now has its own inverted yield curve. As of December 1, it looks as follows:

Figure 1

Source of raw data: U.S. Treasury

As we noted earlier in the week, an inverted yield curve can safely be interpreted as the market expecting lower inflation in the near future. Therefore, this is good news for the U.S. economy, and for investors who do not like negative real interest rates. 

This week, we also published another estimate of just how much the U.S. debt will cost U.S. taxpayers in the current fiscal year. Our forecast is based on two scenarios, with both being based on the same growth rate for the debt itself, of 0.37 percent per month. 

Scenario 1 assumes that the debt cost—defined as the sum total of the median yields paid out per U.S. Treasury auctions—will increase linearly throughout the remainder of the fiscal year. The assumed growth rate is the same as seen in November, namely 7.13 percent per month. 

Scenario 2 assumes that the yield cost increases at a decreasing rate, where next month's growth rate is 9/10ths of that in the previous month. This reduces the growth rate to 2.76 percent in September 2023. 

The debt is plotted in Figure 2 as columns, while the solid and dashed black lines show the growth trajectories of the debt cost under Scenario 1 (solid) and Scenario 2 (dashed):

Figure 2

Source of raw data: U.S. Treasury

In both scenarios, the total debt cost will pass the $1 trillion threshold before the end of the fiscal year. 

There are points to be made about these scenarios, the first of which is the assumption about the linear growth in the debt stock. It is uncontroversial insofar as current fiscal policy is concerned, with Congress having shown no interest in addressing the structural debt. However, if a razor-thin Republican margin in the House actually starts working on a plan to address the debt, there is a theoretical chance that Congress—while the plans are being hashed out—agrees to a general policy of ad-hoc spending restraint. This could moderate the growth of the debt, though not by so much that it would materially affect the growth of the debt cost.

A more contentious assumption is that which says the yield cost will continue to rise, either linearly or at a decreasing rate. If interest rates stabilize in the 4-4.5 range, as they seem to have done now, is there not a case to be made for the average yield on the U.S. debt to stabilize as well?

The answer is negative, for one simple reason: a massive body of debt is going to mature during this fiscal year, which was sold at auctions during the pandemic. More than $1.6 trillion of that debt currently costs the Treasury 0.21 percent per year, on average; if that were to be refinanced at an average four percent, the annualized cost for the debt would go up by well over $60 billion.

Please note that this is an annualized estimate; the actual fiscal effect depends on when the debt replacement is done, i.e., how much of the fiscal year remains at the point of auction. Nevertheless, this example illustrates the key point, namely that:

• even if the debt itself stopped rising, and
• even if interest rates at Treasury auctions stopped going up,

the cost of the debt would continue to increase simply by the forces of debt rollover. 

If the debt cost exceeds $1 trillion for the current fiscal year, it will make the debt the second biggest item in the federal budget. 

We expect that when this cost trend becomes apparent to sovereign-debt investors, they will see an emerging risk for a partial U.S. debt default, a.k.a., a fiscal "haircut". This will put significant upward pressure on interest rates at both the auctions and the secondary market. As this happens there will be renewed pressure on the Federal Reserve to re-enter the sovereign-debt market. If it resists, which is likely, the stakes will rapidly escalate. 

As always, to keep track of the market's confidence in U.S. debt, keep an eye on the Tender-to-Accept ratios we report on here, on a daily basis. When the T/A falls, it means fewer investment dollars are available for every dollar of debt the Treasury wants to sell. 

Another indicator is a negative correlation between the T/A ratio and median auction yields. Given a declining T/A, a more pronounced negative correlation means we are moving steadily toward a fiscal crisis. 

We report on all the relevant numbers here, on a daily basis. Click to sign up for free daily updates.

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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.

 

Market Reinforces Inverted Yield Curve

 In Thursday's auctions, the Treasury sold a total of $92.4 billion in debt. It was split evenly between the 4-week and 8-week auctions. Investor offers were not evenly split: $155.6 billion were tendered for the 8-week, with only $125.6 going toward the 4-week bill. 

The 8-week auction produced an unusually large T/A ratio: at 3.37, it went up significantly from last week's 2.76. It was also the highest in at least ten weeks. The T/A at the 4-week auction also increased, but only from 2.5 in the last two weeks, to 2.72. 

With a sharp rise in the T/A ratio, the 8-week auction came away with a lower median yield than last week: down to 3.9 percent from 4.08. This means that last week's batch of $51.6 billion 8-week bills is the only one currently that pays a yield above four percent. 

By contrast, the 4-week auction pushed the median yield up from 3.9 percent to 4.05 percent. No other active batch of 4-week bills pays above four percent.

The 4-week replaced a larger, maturing batch of $66.8 billion. The debt sold under the 8-week bill was close to the $46.9 billion that matured with this auction. 

As a result of the spike in the 8-week T/A ratio, the estimated average T/A for the entire U.S. debt now stands at 2.249, up from 2.234 yesterday and 2.232 the two auction days before that. 

The inverted yield curve we mentioned earlier in the week, remains in place. In today's secondary-market auctions, the yield on the 20-year bond fell from 4.00 to 3.85 percent, which means that all Treasury security maturity classes above two years pay less than four percent, but all classes 2 years and shorter pay more than that.

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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.