US Public Debt Obsession: Footprints on the Global Financial Market

In addition to inflation and a high interest rate environment, US public debt continues to accumulate silently in ever-increasing amounts. Viet Hustler readers may already be familiar with warnings about the potential explosion of a US public debt crisis. But perhaps not many people realize that the impact of this accumulating public debt is gradually emerging on the global financial market as:

• Demand for US Treasury bonds from foreign investors decreases, 

• The USD and US bonds lose their status as reserve assets for Central Banks, and 

• There will likely be more stress in short-term funding markets such as overnight repo... 

Therefore, this weekend's macroeconomics column from Viet Hustler will be dedicated to updating recent data on the US public debt situation. In particular, Viet Hustler will provide fundamental analysis on the current imbalanced debt structure of the US government and its accompanying consequences.

Disclaimer: Some views below reflect the personal perspective of the Viet Hustler author team and are not investment advice.

Recent years' US government debt issuance situation

• Total US Treasury outstanding debt has increased 5x in ~16 years (from 2008).

  • And currently, the debt ceiling is almost no longer a concern for the US government!

  

• Short- to medium-term debt exceeds long-term debt: 38% of outstanding debt matures in the next 2 years.

  

• The amount of medium- to long-term debt (maturing from 2 to 30 years) that the US government is issuing continues to rise sharply:

  

  • The sharp increase in 2020-2021 was to fund Covid pandemic damages...

  • But now debt is rising like this... to fund rising debt servicing costs and fiscal spending deficit (up to >-6% GDP).

  

Many believe that the rise in US Treasury yields (US government's borrowing costs) over the past 2 years is due to the Fed raising interest rates...

This is true! But not enough! 

Even if the Fed cuts interest rates in the next 2 years, the US government's borrowing costs may not return to the low levels of the pre-Covid era.

• Simply because the total market outstanding debt of the US government is at an alarming level: accounting for ~99% GDP of the US (projected to rise to ~120% GDP in 2033)

  

In addition to the accumulating outstanding debt rising sharply, the US government's debt structure is becoming increasingly imbalanced....

• .... this has begun to affect the position of US government bonds as well as the USD in the international financial market!

• .... and the balance of the US financial market itself!

Imbalance in US debt structure: Footprints on the global financial market

There are 2 issues with the market debt structure of the US Government that could threaten the financial market and the position of this leading economy: 

Issue 1 - Demand to hold US Treasuries is declining among global institutional investors

Demand for US Treasuries from foreign investors decreases: especially medium-term bonds (<10 years) which are a hot spot in the debt market.

• Especially as the supply of US Treasury debt has increased in recent years, causing supply to exceed demand...

(The data below is only updated to the end of March 2024)

• Foreign investors' holdings of Treasury bonds appear to continue increasing and reach a new high in March: at the level of > USD 8,000 billion.

  

• But the increase in holdings by foreign investors cannot keep up with the increase in Treasury issuance!

  • Investors (NĐT) outside the US currently hold only 30% of the total market outstanding debt of the US government, down from a peak of 55% in 2008.

    

In particular:

• Foreign Private Investors are increasing their holdings of US Treasury debt. 

• Meanwhile, foreign official financial institutions (Foreign Official - including governments and central banks) have gradually reduced their holdings of US Treasury bonds in recent years.

• The amount of Treasury Bills (T-Bill, maturity <1 year) held by foreign private investors has far exceeded the amount held by foreign financial institutions.

• The amount of T-Bonds and T-Notes held by foreign private investors has also increased by about +2,500 billion USD since 2010

  • … now on par with the amount held by foreign public investment institutions. 

  

• Foreign private investors outside the US are also holding a stable ~20% of the T-Bonds and T-Notes in the market… even though the Treasury has increased debt issuance.

• While the % holdings of these bonds by foreign public financial institutions has decreased significantly…

  

At this point, readers may ask: 

• So what if public financial institutional investors reduce their holdings of US Treasury bonds? 

• Isn't the demand from private investors still good?

=> The answer is: Not good at all!

Because:

• Private investors tend to be more sensitive to bond prices/yields: 

  • They are buying more US Treasury bonds because the yield on these bonds is rising – and it's still the safest asset! 

• While institutional investors are less sensitive due to considering long-term benefits: 

  • And they were previously always the primary holders of US Treasury bonds:

    • … clearly showing that the position of the USD (reserved through US bonds) was still strong at that time!

    

  • Their reduction in holdings of US government bonds is because they are doubting the strength of the USD itself and the influence of the US economy!

And clearly, the current decline in demand for US Treasury bond holdings from institutional investors coincides with the decline in the USD's position:

• Especially when the PetroDollar system is being threatened:

  • The Dollar may no longer be the only currency in crude oil trading! (Details: the end in Podcast of Viet Hustler)

• And of course, in another Podcast, Viet Hustler has previously analyzed: 

FYI: Demand for US Treasury bonds in China + Hongkong has decreased -- replaced by increased demand in Europe => Showing the two poles of influence of major currencies: 

• Asian currencies are now increasingly influenced by fluctuations in the Yuan. 

• While USD still holds the top position but has greater influence in the West.

  

Issue 2 - US Treasury is issuing too much short-term debt

• US outstanding debt rising + borrowing rates also rising: causing just the US interest payment costs on debt have exceeded defense spending.

  

• This makes the Treasury unwilling to issue long-term debt:

  • because Yellen doesn't want to lock in debt at high rates for 3, 5 or 10, 20 or even 30 years

  • so Yellen is still hoping that next year the Fed will cut rates more.

=> This is the main driver for the Treasury to issue more and more short-term debt with Treasury bills under 1 year maturity, T-bill.

• In Q1/2024, the US Treasury issued nearly 80% of new debt as T-bill!

  

Next question:

The problem for the US government:

• Unable to finance long-term economic projects:

  • The Treasury always has to worry about ROLLING OVER DEBT - weekly, monthly, and quarterly… without long-term capital sources.

  

• This causes outstanding debt to increase while the Treasury's cash account (amount of money to spend) does not increase correspondingly:

  

•  Issuing short-term debt to pay off long-term debt (through the buyback program - repurchasing Treasury debt) reduces the US government's long-term capital.

  • Not to mention the buyback program (with the amounts below) only serves to soothe the debt market – without solving the massive backlog of outstanding debt!

  

But the US government's own problem is not as severe as the impact on the global financial market:

• If the Treasury continues to flood the market with a large volume of T-Bill, it could harm the quantitative tightening (QT) that the Fed uses to combat inflation:

  Why? 

  Because T-bills are still counted in the M2 money supply! 

  • Instead of locking their money in long-term investments, people put money into T-Bill and can easily withdraw it after a few days / weeks / months to spend.

  • Especially when they earn some interest from T-Bill in their accounts, they have more incentive to spend!

• Excess supply of T-bills will disrupt the short-term debt market and the interbank lending market.

  • Remember the repo crisis in September 2019: when there was a shortage of buyers in the repos market, overnight repo rates spiked to 10% forcing the Fed to intervene urgently.

    

  • Of course, the impact of increasing T-Bill supply won't disrupt the repo market as suddenly as that…

  • … but in the long term, it will also reduce repo market demand – causing short-term interbank borrowing rates to gradually rise!

CONCLUSION

It can be seen that, besides the US government's cumulative outstanding debt gradually increasing, the US public debt structure is also gradually becoming imbalanced — as the Treasury issued 80% of new debt in Q1/2024 through short-term debt (T-Bill). If we think that high outstanding debt, more short-term than long-term debt… is still not enough to create any big waves in the debt market … then we are probably wrong!

• Bond yields (US government's borrowing costs) are rising … causing interest payment costs to officially exceed defense spending!

• More debt is issued - but the Treasury's cash reserves for national projects do not increase correspondingly with the debt growth rate…

• The US government's bond buyback program may make the Fed's inflation fight more difficult.

In addition, the first signs of the US's massive public debt issuance problem have appeared in the international debt market:

• Is their demand important? ===> Extremely important!

Foreign investment institutions (including central banks) hold US Treasuries as a way to reserve USD without depreciation:

• Because of the importance of the USD in international trade, energy trade, and finance, they may need USD at any time.

And their reduction in US Treasury reserves is happening simultaneously with the USD's position being shaken in the commodities and energy markets!