U.S. Treasury: More Borrowing, Less Short-Term

The Treasury released its quarterly update on its borrowing needs yesterday. The headline is that Treasury expects to borrow $406 billion during July, August, and September. That’s a gigantic figure, but it is down from the roughly $530 billion that Treasury borrowed during those three months last year.

When combined with $1.4 trillion in borrowing during the previous nine months, the $406 billion will bring total borrowing to $1.8 trillion during this fiscal year (Oct. 2008 to Sept. 2009).

The Treasury release includes a number of fascinating charts about the size and composition of our nation’s debt. One that particularly caught my eye was this chart showing the percentage of outstanding debt that is scheduled to mature in the next 12, 24, or 36 months:

As you can see, Treasury has relied heavily on very short-term maturities to finance the recent burst of borrowing. Most notably, the fraction of debt that matures within 12 months (the blue line) reversed its decline and rose to levels not seen since the mid-1980s.

Students of financial crises, past and present, will recall that over-reliance on short-term debt is a classic precursor of financial distress. Think, for example, of the major financial firms that had to roll over significant fractions of their financing every week … or even every day.

I don’t think the recent boom in short-term borrowing reflects (yet) that kind of challenge for the federal government. Indeed, there’s a good argument that the government was satisfying heightened market demand for short-term, low-interest rate debt. Among other things, that’s enabled the government to pay less in overall interest this year, despite the dramatic increase in outstanding debt.

Still, you can understand why the fine folks at Treasury wouldn’t want this reliance on short-term debt to continue. Among other things, it could be a costly strategy if they believe that interest rates will rise in the future.

It isn’t surprising, then, that Treasury’s “hypothetical” projections show less reliance on short-term Treasuries in coming years. The magnitude of the decline, however, is impressive. Under those projections T-bills maturing within a year would fall from around 43-44% of outstanding debt to about 27%.

Let’s hope there’s a healthy market for all the longer-term debt Treasury will want to issue.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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