Lew: Interest Rate on T-Bills Nearly Tripled In One Week
(CNSNews.com) - Testifying in the Senate Finance Committee on Thursday, Treasury Secretary Jacob Lew said that the Treasury last week needed to offer nearly triple the interest rate it had offered the week before in order to sell Treasury bills at public auction.
“At our auction of four-week Treasury bills on Tuesday, the interest rate nearly tripled relative to the prior week's auction, and it reached the highest level since October 2008,” he said.
In fact, according to data published by the Treasury, the short-term Treasury bills that mature in four weeks sold at an interest rate of 0.122 percent on October 3. On October 10, they sold at an interest rate of 0.355. That means the interest rate on 4-week bills did indeed increase by 2.9 times in just one week.
The jump in interest rates is significant because the Treasury is continually churning a large portion of the debt which consists of short-term Treasury bills (that mature in anywhere from a few days to 52 weeks) and middle-term Treasury notes (that mature in from two to ten years).
The upside of these securities is that the Treasury can market them at lower interest rates than 30-year Treasury bonds. The downside is that the Treasury needs to constantly find customers to buy the huge volume of debt it rolls over.
“Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.”
“At the same time, we're relying on investors from all over the world to continue to hold U.S. bonds,” he said. “Every week we roll over approximately $100 billion in U.S. bills. If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.”
The Daily Treasury Statement for Sept. 30, 2013—the last day of fiscal 2013—shows that during fiscal 2013 the Treasury had to pay off a record $7,546,726,000,000 in Treasury securities that had matured.
To get the cash to pay off the $7,546,726,000,000 in maturing Treasury securities—and also cover new federal spending over and above the $2,419,221,000,000 in tax revenues collected--the Treasury needed to turn around and sell $8,323,949,000,000 in new Treasury securities in fiscal 2013.
That means that to service the existing debt and cover existing federal spending programs, the government needed to increase the net value of extant U.S. Treasury securities held by the public by $777.233 billion in fiscal 2013.
Even if Congress had cut federal spending by $777.233 billion to spare the Treasury the need to sell that much new debt, the Treasury still would have needed to find investors willing to buy $7,546,726,000,000 in new Treasury securities in fiscal 2013 to pay off the $7,546,726,000,000 in old securities that matured during that time.
As of Sept. 30, according to the Treasury, the U.S. government had $11,577,400,000,000 in outstanding publicly traded debt. Only about $1.3 trillion of that was in 30-year bonds, earning an average interest rate of 5.101 percent. Another approximately $936 million was in Treasury Inflation-Protected Securities, earning an average interest rate of 1.084 percent.
But the lion’s share of that publicly traded debt—$9.3 billion or about 80 percent--was in Treasury notes (about $7.8 trillion), which mature in two to ten years, and Treasury bills (about $1.5 trillion), which mature in anywhere from a few days to 52 weeks.
In September, the average interest rate on Treasury notes was just 1.808 percent, and the average interest rate on Treasury bills was a miniscule 0.074 percent.
As a result of these low rates on bills and notes, the average interest rate that the Treasury paid in September on all of the U.S. government’s marketable debt (bonds, TIPS, notes and bills combined) was just 1.981 percent.
Back in January 2001, the average interest rate on all marketable Treasury securities was 6.620 percent—or about 3.34 times what it was this September.
In fact, in January 2001, the average rate even on short-term Treasury bills was 6.059 percent. That is 81 times higher than the average rate this September.
In fiscal 2013, because of the low interest rates, the government paid out only $224.695 billion in interest on its securities. But if the average interest rate on these securities were to rise to the level they were in January 2001 (3.34 times as great as they were this September), the Treasury would need to pay about $750 billion in interest on just its current volume of marketable debt.
However, because the government is running a deficit—by spending hundreds of billions more than the tax revenues it collects—the only way the Treasury could pay that higher level of interest would be to borrow that much more from new investors.