How Rising Rates Have Impacted The Debt Ceiling

Published on: 05/16/2023

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss the debt ceiling and how Government financing has contributed to it.

 

TRANSCRIPT

TONY:

Welcome to another edition of Chart Talk.  I’m Tony Ogorek.  I’m here with Jeff Viksjo. I’m here with Jeff Viksjo. And Jeff, today we’re going to talk about the debt ceiling, the Federal debt ceiling, and how the government finances things.  How that has that contributed to where we are today. So, we’ve got three charts.  Let’s take a look at the first one.  And this takes a look at something really, really interesting.  You know, we know the government may run out of its debt ceiling authorization by the beginning of June.  And here we’ve got a chart of treasuries and it looks sort of interesting, doesn’t it?

 

JEFF:

Yea so, Janet Yellen said the debt limit could be reached as early as June. So, this chart shows the treasury bills, what they’re yielding based on when they mature.  So, between May, and includes that period that we’re talking about in June where the debt limit may be reached.  And you can see, the yields are much higher after the limit is reached.  Meaning, investors want a little bit more compensation for owning a bill that matures, potentially, after the government can’t borrow anymore.

 


TONY:

Right, so people often times think of the market and say, “well if the stock market is going up it can’t be that bad”.  But the bond market really is indicating, you know, we’d just like a little bit more yield on things to compensate us for some of the implied inserting that’s going on. 

And so, you know, we look at that debt ceiling and it always ends up Jeff, getting to deal with spending.  But also, a significate part of that is, like, how we finance that debt.  So, let’s take look at the next chart, and this one’s really interesting.  At the left end of the chart, you see, we’re financing at a short maturity.  And as we go out, you know, the maturities go out to 30-years.  And this is, really, sort of, an interesting chart, isn’t it?

 

JEFF:

Yea, when homeowners take on debt in the form of a mortgage, and interest rates are low, you know, they want to lock that low interest rate in for as long as they can.  They get a 30-year mortgage, that’s usually what we would recommend Tony, correct?  The government when they borrow, they go very, very short-term.  And Tony, the reason is, historically, short-term debt has been cheaper.  Normally, the yield curve slopes up, or meaning the longer-term bonds will yield more.  The short-term stuff has been, basically, around zero for the last 10-years, so it has been very, very cheap to buy short.  So, that’s what the Fed has done, in the treasury.

 

TONY:

Yea and so Jeff, same thing for a corporation when they see rates are down, they issue a lot of debt, right?  And so, what ends up happening here is, when it’s cheap, you know, people tend to be injudicious with things.

And that leads us to our next chart, which takes looks at what the actually carrying costs of, you know of, the cost of interest is in the budget.  And you can see this line is just climbing to the sky.

 

JEFF:

Yea, this just shows you, because the government hasn’t locked in those low rates, so they kept it short, which was great, as long as rates stayed low.  We know rates have shot up and so their interest has shot up now too.  And of course, they already run at a deficit Tony, so those interest, they just need to borrow more to pay the interest now.

 

TONY:

Yea, so Jeff, I think the bottom line is, it’s not just spending, but these low rates have encouraged them to spend, not pay for it, and now that rates are up, now the chicken have come home to roost.

So, thank you Jeff.  And thank you for watching this edition of Chart Talk.

 

 

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