Are things coming to a head in the US with respect to the huge issuance of US government debt? This note analyses this question providing hard data on debt sustainability.
If the Fed maintains restrictive high interest rates for a prolonged period, say 6 to 9 months, then the US Treasury (UST) is likely to have a maturing debt refinancing issue as well as a deficit funding problem given the bloated US Federal Government debt situation. This is because the yield curve remains inverted, making bond investments unattractive in a period of enhanced duration supply.
This issue is firmly on the shoulders of US domestic investors as the Fed is undertaking QT (thereby further increasing the net supply) and foreigners are purchasing US debt at a slower pace than the overall debt increase. This is being compounded by the increase in duration coming to market as the UST extends maturing Bills into longer dated coupon paper.
The combination of higher interest rates and a larger debt stock has led to a higher interest cost for the US government, which has already doubled recently as a percentage of tax revenue (pink – chart below). The longer rates remain high, the more this higher cost gets ossified on a permanent basis. And rather unusually, this is occurring during a period of relatively high economic growth. Any expectations of an economic downturn would lead to some concerns about fiscal sustainability should the Fed continue to undertake QT or remain on the sidelines.
The "get out of jail" card would clearly come from weakening economic and disinflationary data, which would make USTs attractive and allow for a duration extension from cash into longer dated bonds.
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