Since Donald Trump won the presidency and the Republicans, a majority in Congress, the bond markets have priced in a steep rise in fiscal deficits. While it is more or less clear that the new administration will cut taxes drastically, a question mark hovers over the extent of infrastructure spending and, indeed, if such spending will even be approved.
“Congressional Republicans are traditionally opposed to deficits and the issue of public debt has led to political (more than economic) crises in recent years with renegotiations of the debt ceiling (in 2011 and 2013). The issues of US debt and fiscal manoeuvring room will be key to the coming years, and this is therefore a good time to look more deeply into their many facets”, explains Bastien Drut, Strategy and Economic Research at Amundi.
US public debt can be split into two categories, said Drut:
- Marketable debt, which is raised on the markets. This is the debt that is traded on the markets each day, including T-bills, T-notes, T-bonds, floating-rate notes, and inflation-linked debt. As of November2016, marketable debt amounted to $13,921bn, or 74.6% of GDP.
- Non-marketable debt, which is raised from US governmental bodies. For instance, US law provides that tax receipts levied to fund the Social Security Trust Fund and the Medicare HI Trust Fund must be invested in US Treasuries, most of the time non-marketable US Treasuries. As of November 2016, non-marketable debt came to $5,481bn, or 29.3% of GDP.
The debt ceiling applies – more or less – to the sum of the marketable and non-marketable debts, when the debt ceiling is not suspended (see below).
Marketable debt consists of:
- T-bills, of an initial maturity of 4 weeks, 3 months, 6 months or 12 months
- T-notes, of an initial maturity of 2, 3, 5, 7 or 10 years
- T-bonds, of an initial maturity of 30 years
- Floating-rate notes, of an initial maturity of 2 years (these were first issued in 2014)
- TIPS, of an initial maturity of 5, 10 or 30 years.
More than 60% of marketable debt is T-notes. After falling precipitously in recent years (after peaking at 34% of marketable debt in 2008), the proportion of T-Bills is being driven back up by the reform of the US money markets (from 10% at and-2015 to 13% today). The expansion of the T-Bill market in 2017 will limit long-dated issuance.
“The average maturity of the US marketable is approximately 5.2 years. It has been rising since 2014. The future Treasury Secretary, Steven Mnuchin, indicated in a recent interview that the new administration would “look at potentially extending the maturity of the debt because eventually, [the US] will have higher interest rates and that this is something that this country is going to need to deal with.” He mentioned the possibility to issue 50 or 100 yr bonds”, concludes Drut.