Federal Debt & Refinancing Risk


Congress recently passed a spending bill1 that authorizes approximately $1T in federal expenditures, keeping the federal government working through the end of the year. The debate was contentious, and involves congresspeople fighting over line items as small as a $6m cut to the EPA.

In unrelated news, federal debt outstanding currently totals more than $10T. Despite S&P’s rating downgrade of the US in 2011, there is little doubt that the US has the ability to pay its debt obligations in principle.

Consider the structure of federal debt. More than $3T of treasury debt has a maturity of less than or equal to 1 year 2.

Here’s a fact: if interest rates increase by 1%, within one year the federal government will be forced to refinance $3T of debt at the new, higher rates, incurring an additional $30B of interest expense each year. This is about the same as the budgets of NASA ($18B) and the IRS ($13B) combined.

And if interest rates increased to their long term postwar average of 3.57%3 for 3m bills (versus .02% today)4, within one year there would be additional interest expenditures of about $105B, which is more than the discretionary spending of the Department of Health and Human Services, and 1/5th the discretionary spending of the Defense Department5.

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