The interest expenses of the U.S. Treasury are approaching a staggering $1 trillion, which is equivalent to 4% of the country’s economy and even surpasses the entire market value of Tesla. This information is based on the latest data from the Bureau of Economic Analysis, which reveals the significant financial burden the United States government is experiencing due to interest payments on its national debt.
The increase in interest expenses, which has nearly doubled since January 2020, is fueled by various factors, including rate hikes by the Federal Reserve that have raised the yields on government debt and a widening budget deficit.
Bank of America’s rates analyst Mark Cabana CFA recently stated in a note that deficits have exceeded predictions from economists throughout the fiscal year due to higher spending and lower revenues than expected.
To finance the growing deficit, the U.S. Treasury is expected to release a large number of government bonds into the market. Bloomberg recently reported that market experts predict a significant increase in the supply of treasuries in the coming weeks. For the first time since early 2021, the Treasury will increase its quarterly refunding of longer-term treasuries from $96 billion to $102 billion.
Bank of America warns that the sizes of treasury auctions are increasing and this will be the first of several quarterly increases to the U.S. Treasury’s coupon calendar.
Bank of America estimates that the Treasury will face increasing financing needs, both in the current fiscal year and beyond. It must also navigate the challenges of a longer Federal Reserve balance sheet runoff, known as quantitative tightening. According to Bank of America’s estimates, taking into account the year-to-date deficit and projections for Q3, the Treasury’s financing needs are expected to reach an astonishing $1.8 trillion in FY ’23.
Analysts are concerned that the larger U.S. Treasury auction sizes could create a challenging supply-demand scenario that could impact market functioning and liquidity, especially during times of economic or geopolitical shocks. Analyst Mark Cabana warns of potential market instability.
The yield on longer-dated 30-year U.S. Treasury bonds has reached 4%, the highest rate since November 2022. It currently stands 1% above the inflation rate, making it the highest “real rate” since June 2020. Bond yields climbing can lead to a decline in the value of these securities and their prices. The Ishares 20+ Year Treasury Bond ETF (NASDAQ:TLT) has been negatively affected by rising bond yields, recording new lows in 2023. It is currently 15% lower than its level a year ago and 6% lower than six months ago.