Bessent Trying to Undo Yellen’s Poor Debt Management | SchiffGold

Current Trends

The government hit the debt ceiling back in January and has been pursuing extraordinary measures since. This usually means dipping into things like Civil Service Retirement funds to free up cash and avoid borrowing any more money.

As the chart below shows, the debt balance has been pretty much net neutral for the last 6 months. One other really important thing to note is that Bessent is slowly working on undoing some of the damage that Yellen did when she pushed a ton of debt into short-term. A lot of the short-term debt has been rolling off for Notes which are typically in the 2-10 year range.

Note: Non-Marketable consists almost entirely of debt the government owes to itself (e.g., debt owed to Social Security or public retirement)

Figure: 1 Month Over Month change in Debt

The debt ceiling will absolutely be raised and the government will go on borrowing way beyond its means. In the last 5 years, the borrowing has not been less than $1.8T. Expect more of the same this year once the ceiling is raised. Given that it has been six months, expect a massive jump in the debt the moment the ceiling is raised. We could add $2T in debt in very short order.

Figure: 2 Year Over Year change in Debt

Given the six month delay, the Treasury has been able to maintain a somewhat healthy cash balance, currently sitting around $375B.

Figure: 3 Treasury Cash Balance

The chart below shows both the maturity of the debt and average interest rate. You can see how Bessent has been extending the debt maturity without impacting the average interest rate.

Figure: 4 Weighted Averages

The true danger facing the government is still in the massive interest currently being paid on the debt. It has risen to over $948B per year! The debt breakdown and true federal interest from the budget has deviated slightly. This is likely from the debt ceiling. It will catch-up once the debt ceiling is raised like it did last time.

Figure: 5 Net Interest Expense

Assuming the Fed drops a quarter point in September and waits a year to drop again, combined with the rolling maturity of the debt, we can forecast out the cost of the debt going forward. Again, the Treasury left “debt affordability” in the rearview mirror in 2021. The Treasury is now absolutely hemorrhaging cash on debt service costs.

Figure: 6 Projected Net Interest Expense

Speaking of debt issuance and rollover, the chart below shows the forecasted debt maturing for 2-10 year maturities. Debt rolling over will be $600B higher in 2026 than it is forecasted to be in 2025.

Note “Net Change in Debt” is the difference between Debt Issued and Debt Matured. This means when positive it is part of Debt Issued and when negative it represents Debt Matured

Figure: 7 Treasury Note Rollover

Yield Curve

The yield curve has gone back to positive sloping between the 2 and 10 year. The Treasury was borrowing short-term the entire time it was inverted which seems like an odd decision. Bessent is now cleaning up that mess as noted earlier.

Figure: 8 Tracking Yield Curve Inversion

Historical Perspective

The chart and table below show how the debt and interest has changed over time.

Figure: 9 Total Debt Outstanding

Figure: 10 Debt Details over 20 years

Wrapping Up

Many Fed officials and market pundits have called the current fiscal situation “unsustainable”. This is a gross understatement. The current fiscal situation is an absolute train wreck with no way out. It has been called a ticking time bomb for decades. That bomb has gone off as interest rate expense ballooned higher. It is worse than anyone could have imagined.

The debt ceiling will get raised. The borrowing will continue unabated and at some point, there will be a major debt crisis. This problem is no longer 10-20 years away. It is quickly becoming something that could happen at any point.

Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!