From a recent piece in the WSJ by the Townsend Group.
Our simple note. The invention of “quantitative easing” essentially meant that the Treasury printed money and the Federal Reserve bought the money and put it on its balance sheet, in addition to open market purchases of mortgage bonds, corporate bonds and related ETF’s etc. The Federal Reserve is now in reverse mode and letting its balance sheet run-off to…its not clear…levels. So to paraphrase the old saying with a recent inflation print of 8%…sell 3.5% bonds to..whom?
There has been a surprisingly weak correlation between the level of the US official indebtedness and the level of interest rates – go look it up. The catch as suggested by the Reinhart-Rogoff economic papers is that is correct until you hit a certain level of debt to GDP and then it starts to matter. We are about there in the US and the below math doesn’t help. One last caveat – we are the Reserve Currency. It may be different for us.
And back to the company analysis.
“Given the extraordinarily low interest rates on new federal debt issued during the recent economic shutdown, federal interest costs barely increased despite the $7 trillion increase in Treasury debt. Over the last three federal fiscal years ending on Sept. 30, 2021, total gross interest cost was $573 billion, $523 billion and $562 billion. (Net interest, after accounting for interest income primarily in government trust accounts, is $150 to $250 billion lower.)
That is changing. Short-term rates have risen 1.5% following the Fed’s 75-basis-point rate increase in June and smaller increases in March and May. By the end of 2022, additional rate increases will bring cumulative rate increases to 3%, according to the Fed’s official guidance. The Fed projects short-term rates averaging 3.4% in December and rising thereafter.
As this additional 3% works its way into the refinancing of maturing Treasurys, federal interest costs will skyrocket. There are about $3.7 trillion outstanding Treasury bills, which mature in less than a year. In 12 months the 3% increase in rates will generate roughly $111 billion in additional annual interest expense on these Treasurys.
There are $2.4 trillion of Treasury notes, which are issued with maturities of one to 10 years, maturing within a year, according to the latest Monthly Report of the Public Debt. The weighted average interest rate on these notes is 1.3%, and the weighted average original maturity is 4.7 years. The current yield on five-year Treasury notes is about 3.25%—1.5 points higher than the high end of the fed-funds-rate range. If these maturing Treasury notes roll over at the same spread over the projected year-end fed funds rate of 3.4%, they will bear interest at 4.9% and cost an additional $86 billion.
Total federal gross interest cost over the 12 months ending on May 31 was $666 billion. If we include the impending extra interest on Treasury bills and the maturing notes, that figure rises to $863 billion. This is a staggering cost.”
