USTreasury update: 2011 debt positioning

{updated with edited errors}

Since my first attempt at analysing the US debt positioning back in 2010 (as posted here), I have gained a bit more insight into how the USTreasury issues and positions its debt via periodic auction. It is important to note the discussion below does not cover the entire debt outstanding of the US, and is only the public Federal Debt as issued by the US Treasury in standard Bills and Notes.

It was obvious in 2010 that there was plenty of wriggle room in allowing positioning of additional debt via careful selection of the various terms (durations) available to the US Treasury. This spreads out the required obligations in a very structured format using bills, notes, or bonds. By front loading larger amounts in shorter durations bills means substantially lower interest yield is payable, minimising ongoing interest bourdon deducted from available Government revenue collected annually. The result clearly necessitates a rolling over of larger amounts more frequently in using the shorter duration Bills.

As can be seen this time around, most of the new debt issued as a result of GFC 2008, shown in the previous post has since reached maturity and been rolled over along with the addition of even more debt. It is evident that saturation (block limiting) is now occuring in numerous short duration bills, and it is now inevitable debt will be rolled over into higher yielding longer term Treasury notes. Bear in mind that the unrelenting demand for US Treasuries has meant that 1yr, 2yr and 5yr yields are now historically the lowest they have been than at any previous time. This means the interest payable on the record debt levels is very low – a single saving grace to the situation now facing the US of inevitable further debt expansion in the short term.

note- all charts are based on non-TIPS, standard issue bills and notes; single auction results of issued amounts as per US Treasury data

Chart 1 – overall trend in outstanding amounts of debt issued as UST bills and notes

Chart 1 2010 debt treasuries

So as not to be confused with the data below, the above shows amounts yet to mature in the various instruments forwards of the chart date. Bills have shorter durations of less than one year, and so the UST restacks the same debt by continuously rolling it over within the same 12 months period. Debt ‘issued’ in 12 months is higher for Bills, but all of this debt expires within a 12 month period (matures) only to be reissued again. When block limits occur in the long part of the Bill duration, it rolls into longer term Notes, where it remains outstanding for much longer durations. It is the form of the curve for outstanding debt in Treasury Notes that is most telling above. How this is achieved is shown below.

CHART 2 – considering only the debt issued as Bills (less than or equal to 1 year duration)
Chart 2 2011 Treasury Bills

Table 1 – numerical totals of debt issued as short term Bills, sorted by maturity date
Table 1 2011 Treasury Bills - trend

Numerical totals (above) of all debt maturing group by year (of maturity), shows where and how much debt is being issued in every increasing amounts. By virtue of the wonderful state of the current US Treasury market (as at Dec2011) all new Bill debt carries an interest yield of less than 0.15% per annum payable. All 2011 debt issued in Bills carries a better than 0.32% interest liability on roughly $5.1Trillion issued in 2011 to date, down from $6.1Trillion issued in 2010. This is a great result for the US Treasury, and a massive windfall to the US (so far). {edited}

CHART 3 – considering only the debt issued as Notes (2 year to 10 year duration)
Chart 3 2011 Treasury Notes

Table 2 – numerical totals of debt issued as longer term Notes, sorted by maturity date
Table 2 2011 Treasury Notes - trend

Numerical totals (above) shows where and how much debt is being issued in increasing amounts. All 2011 debt issued in Notes carries a better than 3.75% interest liability on a total of $1.74Trillion issued in 2011, down from $2.1Trn issued in 2010. {edited}

The US currently has a mandatory ongoing Federal debt expansion burden of $1.1Trillion per year as a direct result of the ongoing Federal budget deficit. Fortunately, as yields continue to decline on sustained demand for US Treasuries, the situation only assists debt issuance since the interest payable on the growing and rolled over debt reduces (perhaps not in total interest payable if the rate of debt growth exceeds rate of yield decline). However, this benefit reverses quickly and with dire consequences on Government revenues if/when the yields start to rise along with sustained levels of budget deficit. This places increased burden on Government revenues required to pay the increasing interest on a growing debt. The situation now facing Japan is much more dire than in the US, where Japan’s debt interest payments alone are now approximately 40% of Government revenues.

In rough terms, what the above equates to is that US Treasury keeps recycling roughly $1.5Trn approximately 3 times within 12 months while adding $1.1Trn in new Federal debt due to the budget deficit. This ensures debt interest payments are kept to an absolute minimum. This says nothing of how the Primary Dealer/repo mechanics manages to maintain both bid/cover and Treasury demand in driving yields ever lower. Bond Total Return funds are enjoying increased capital gains at the loss of fixed income yield – a situation that is now similar to Japan.

Debt interest payments that exceed 10% of Government revenues opens up the potential of a downgrading of sovereign debt. It is beyond obvious that Japan has already passed that threshold and most likely heading down a one way street. The US has some ways to go yet, with ultra low yields helping sustain their cause. Thankfully, so far. Lucky for them hey?

Regards,

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About atradersrant

Self-employed private trader of equities, commodities and FX for income and investment; Follow me at your own risk! I provide analysis of major market & economic trends .. with too much commentary on fraud and corruption that is rife in the open market.
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