Appartently, Joe Biden and fellow big spenders in Washington DC, Mordor on The Potomac, don’t care about fiscal discipline. With seemingly endless spending of wars (Ukraine, Israel, Taiwan and the invasion at our southern border, and inane “green” spending,
Janet Yellen and the US Treasury will be auctioning off $776 billion of debt in the final quarter of calendar 2023, a bit below market expectations. Treasury said it will auction another $816 billion in the first quarter of 2024. So, that is yet another $1.6 TRILLION in debt.
The rapid rise in US yields to ~5% points to the government’s annual interest-rate bill rising to 4.5-5% of debt outstanding in the next six months. That’s in the region of $1.7 trillion – or the GDP of Australia – each year.
Such large payments are negative for the economy. Interest is likely to be paid for using higher-velocity money (e.g. taxes) and received by holders less likely to spend the proceeds in the broad economy, and instead re-invest it. Independent monetary policy becomes increasingly difficult when the equivalent of 6% of US GDP is being diverted towards interest payments each year.
It’s not only the size of Treasury borrowing that’s a problem, but it’s maturity composition.
Today’s recommended financing schedules gave further color on longer-term debt issuance needs (i.e. debt that’s not bills).
Issuance has latterly been skewed to bills, which has ameliorated the impact on liquidity as money market funds have been able to intermediate through the reverse repo (RRP) facility at the Fed. But as issuance skews back towards longer-term debt (watch for increases in auction sizes in 2y, 3y, 5y, 7y, 10y, 20y and 30y debt for insight on this), that will have an increasingly negative impact on liquidity, especially if the Treasury maintains its large cash balance at the Fed (as it said on Monday it expected to do).
The Fed has little (or no) say over any of this.
Monetary policy will become increasingly overwhelmed in such an environment, which is why today’s Fed meeting, where it is expected to keep rates on hold, is a bit of an afterthought.
Also of more consequence currently is Japan.
The BOJ’s decision to maintain negative yields and keep its yield curve control policy largely intact ladles on yet more underlying risks to the global macro environment.
Allegedly, The Fed isn’t interested in buying additional US debt, and likely China and Japan won’t be buying our debt either. But maybe the REAL Federal government, Blackrock and their friends will buy the debt!