The U.S. Treasury cranked up yet another auction for federal debt on Monday and Tuesday. It’s the kind of event only investors—including banks and foreign countries—pay much attention to, but that may be changing. Because there is a growing concern that under President Biden’s spending spree, the government may be about to reach “peak demand” for U.S. debt.
Let’s start with the fact that the federal government has a lot of debt to sell. According to the Wall Street Journal, the government has sold “$20.8 trillion of new Treasurys in the first 11 months of the year—set to surpass 2020’s record of just under $21 trillion.”
Wait, isn’t federal debt held by the public—which excludes the $7 trillion in intergovernmental holdings such as Social Security—$26.8 trillion? And yet the federal government has had to borrow $21 trillion in one year?
Yes, and that’s because trillions of dollars in U.S. securities matured. In essence, the government has to re-borrow that money even as it has to borrow additional money.
Let’s just say having to borrow $21 trillion in a year can strain investors’ appetite for federal debt. And it may already be happening.
Currently, 30 percent of federal debt is held by foreign countries.
Japan is the largest foreign holder of U.S. debt: $1.116 trillion. However, the Bank of Japan has held interest rates at near zero, even as other central banks have raised interest rates. Recently, the BOJ has begun raising interest rates, if only slightly. Although we haven’t yet seen a drop in Japan’s willingness to buy U.S. debt, that may happen if the Japanese begin repatriating their money to take advantage of the BOJ’s interest rate increase.
At $805.4 billion, China is the second largest foreign holder of U.S. debt. However, that’s the lowest amount the country has held in 14 years, and China’s appetite is likely to decline even more as it redirects capital to its sagging economy.
Many analysts claim there’s no indication that the public has reached peak demand for U.S. debt, but that assessment may be misleading. In last summer’s debt auction, there was a notable weaking of demand for long-term (30 years) debt, which meant Treasury had to bump up interest rates.
In response, Treasury has decided to auction more short-term debt (i.e., less than a year). That move increased demand because investors didn’t have to tie up their money for so long.
Now the question is whether investors will sour on short-term federal debt, and what happens to markets and the country’s credit rating if that happens? We will probably know soon, because there is no indication that Biden, or Congress, has any intention of ending the spending spree.
December 12, 2023