U.S. Debt Surges – Uncertainty Looms for Investors And Economy

On our website, earlier in an article titled “How Much Debt Is Too Much?” We stated that it is important to address the looming National debt sooner rather than later. We highlighted the potential serious crisis/trouble the U.S. might face if the Debt ceiling is not raised on time.  In this article. titled “U.S. Debt Surges – Uncertainty Looms for Investors And Economy”, we are going to discuss about looming fears and growing apprehensions surrounding  the surge in U.S. Debt  

Introduction

The U.S. faces an impending crisis as its national debt skyrockets, reaching a staggering $33 trillion as of September 2023. This unprecedented debt surge looms ominously, presenting an uncharted challenge for the economy. With the U.S. Treasury compelled to issue more debt in the form of Treasury securities, concerns arise over the economy’s ability to sustain financing for such monumental sums, far exceeding incoming revenue. As the Treasury grapples with increased borrowing costs, investor worry intensifies, exacerbated by the gradual reduction in longer-dated debt issuance and a marked rise in long-term interest rates.

U.S. Debt Surge and Treasuries Action

According to the U.S. Treasury’s Monthly Statement of the Public Debt, the total outstanding amounts are more than US $ 33 trillion (the exact amount as per the monthly statement is US$ 33,167,334 Million) as of 30^th September 2023. So far it was only theoretical that the U.S. Debt surge may cause a big threat or problem for the economy. 

For the first time, the U.S. is going to witness the real effects of unsustainable debt. This is going to be a real challenge for the U.S. economy as it is to finance trillions of dollars which is beyond their incoming revenue. Now, the treasury is planning to issue more debt in the form of Treasury securities which even the global markets can absorb immediately. Due to a surge in borrowing costs, the U.S. Treasury Department is slowing the pace at which it issues longer-dated debt. 

On Wednesday (1^st November 2023), the U.S. Treasury made an announcement which was based on the Treasury’s decision in August to dramatically increase its borrowing across the board. This is a move that sent yields on 10 and 30-year U.S. government bonds to the 16-year highest level in subsequent months. 

In its Press Release U.S. Treasury stated that it is offering $ 112 billion treasury securities to refund approximately $ 102.2 billion of privately-held Treasury notes which are maturing on November 15, 2023. The Treasury stated that this issuance will increase new cash from private investors by approximately $9.8 billion.

The U.S. Treasury stated that it may continue to increase the issuance of short-dated at a speed of three months ago. And it may slow the speed of 10 and 30-year bond issues. In order to meet its borrowing needs the U.S. Treasury plans to increase the auction sizes to 2- and 5-year notes by $3 billion per month, the 3-year by $2 billion per month and the 7-year by $ 1 billion per month. 

The Treasury in its Press Release stated further that as a result the auction sizes of the 2-,3-,7- year will increase by $6 billion, $9 billion, and $3 billion, respectively by the end of January 2024. The Treasury is also planning to raise both the new issuance and reopening auction size of the 10-year note by $ 2 billion and the 30-year bond by $1 billion. It also plans to maintain 20-year bond new issuance as well as reopening auction size. 

The Treasury plans to increase the November and December reopening auction size of the 2-year Floating Rate Note (FRN) by $2 billion and the January new issuance auction size by $2 billion. 

The following table shows the actual auction sizes for the August to October 2023 quarter as well as the anticipated auction sizes for the November 2023 to January 2024 quarter:

Sources: Treasury Website

On October 30, 2023, the U.S. Department of the Treasury announced its current estimates of privately-held marketable borrowing for the October–December 2023 and January–March 2024 quarters. It is expected that the Treasury will borrow $ 776 billion in privately-held marketable borrowing for the quarter of October–December 2023; assuming an end-of-December cash balance of $750 billion. For the Quarter of January–March 2024, the Treasury expects to borrow $816 billion in privately-held net marketable debt, assuming that by the end-of-quarter (i.e. March 2024) with a cash balance of $750 billion. 

Looming Fears and High-interest Rate Expenses

There is a looming fear among investors as the long-term interest rates continue to rise. The long-term interest rates continue to rise not just because the Federal Reserve is keeping rates higher for a longer time, but because the mounting federal debt is pushing it. 

According to the Treasury Department’s Final Monthly Treasury Statement, Receipts and Outlays of the U.S. Government (For Fiscal Year(FY) 2023 Through September 30, 2023, and Other Periods), the net interest costs have reached $659 billion – which is 2.5 percent of GDP in the FY 2023. This is an increase of $184 billion from the previous year. 

This means that interest is one of the fastest-growing spending/expenditures of the Federal budget. Interest rates grew from $221 billion in 2013 to $ 345 in 2020. Now, it has nearly doubled to $659 in 2023. In terms of a percent to GDP, it has grown from 1.6 percent of GDP in 2020 to 2.5 percent of GDP in 2023. The Congressional Budget Office (CBO) has forecasted that the interest expense may double in the next decade. It is expected that increasing interest rates and mounting debt may cause net outlays for interest to increase from 2.5 percent of GDP in 2023 to 6.7 percent in 2053. 

When it comes to newly issued Ten-year Treasury notes paid an average of 3.8 percent in FY 2023 while compared to 2.4 and 1.1 percent respectively in 2019 and 2020. The newly issued three-month Treasury Bills paid an average yield of 5 percent in 2023 compared to 2.3 and o.7 percent respectively in 2019 and 2020. 

Recent increase in Treasury bond issuance – to help the government finance for its increasing deficit – hardly got any buyers by surprise. Even the biggest buyers of domestic commercial banks and foreign governments have been reducing their purchases. Along with this the present Geopolitical tensions and wars are having concern as the government outlays will increase to provide aid to its allies which will result in more debt and will undermine the investors’ confidence in government bonds.

Debt Projections by CBO and Financial Report of Treasury

According to CBO’s “The 2023 Long-Term Budget Outlook”, the federal debt held by the public will reach 98 percent of GDP by the end of 2023. The report also states that debt-to-GDP will surpass its historical high in 2029 by reaching 107 percent of GDP and will climb to 181 percent of GDP by 2053. 

According to the Financial Report of the United States Government, the debt-to-GDP ratio was approximately 97 percent at the end of FY 2023. The report states that with the current policy and based on its assumptions, it projected that Debt may reach 566 percent in 2097.  This means that the current policy is unsustainable, said the report. 

Our Perspective/Conclusion

Interest Rates are at a 16-year high. The Current Debt holdings, which were originally borrowed at a low-interest rate, will now be rolled over at much higher interest rates. The Federal government is to add roughly $2 trillion per year to the national debt, which will have an additional burden on the economy. 

The rising and high debt is posing a significant threat to the fiscal and economic outlook. We see that growing debt, geopolitical tensions, increasing interest payments, and reduced demand in the Treasury market are all adding pressure to the cost of borrowing as well as the economy. This will affect consumer and business spending; which in turn affects the economic growth and financial markets. In simple terms, it affects the economy as a whole. 

Against the backdrop of recession fears, the surge in U.S. debt places additional pressure on policymakers, demanding a precarious balancing act to steer the economy in a favorable direction. In fact, it is going to be a tightrope walk for the policymakers to ensure all falls in the right place to make things work for the economy. 

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