Another perspective to get a sense of the US Government debt burden is to look at the interest cost side of the equation. Delving into the US Treasury Department’s Treasury Bulletin, we find some interesting data. We note (see table below) that the annual interest cost on US Treasury securities has been inching up since 2016. Interest costs as a percentage of total government receipts (that is to say, tax it collects), has gone from 13.16% in 2016 to 15.28% as of fiscal-year-end 2020 (which was on September 2020). The upward trend post-2016 was the combined result of an uptick in both debt issued and increases in interest rates. In 2020, however, although the amount of debt increased, the FRB’s action to lower interest rates provided a cushion by preventing interest costs from rising when compared to the previous year – in fact, costs declined.
Turning into the private market holdings of US Treasury debt (see Table below), we see that the lion share of the distribution of debt maturity is within the 0 – 5 year span, ranging from 69.74% to 75% of the total. Short-term refinancing poses a risk when it comes to the rolling over of debt: as debt reprices in a higher interest environment, interest costs will spike; and similarly there may be less investors willing to enter the market at the prevailing interest rate, and as such demand much higher rates. Costs can therefore spiral out of control fairly quick. In the case of the US, as it is evident from recent experience, the FRB will step in and purchase US Treasuries if excess supply exists. However, the FRB cannot indefinitely continue to do so, unless it “pays the price” by way of a currency depreciation – which in fact it is what has happened since 2Q2020 if one looks at the US Dollar Index (ticker: DXY).
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