US Debt Levels & Interest Rates

Jason Trennert wrote an interesting little editorial in Friday's Wall Street Journal reminding us of the nature of short-term funding, and the folly of relying on it.

He ends his piece with a quote from Hemingway,

"In this context, it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly." "

Trennert is doing us all a service by reminding us of what happened to Bear Stearns and Lehman. When markets lose confidence, what was gradual bankruptcy, often in the form of higher interest rates and shorter lending maturities, suddenly becomes no funding at all.

He notes that the US Treasury has shortened our funding cycle to the point that we now owe "$5.2 trillion due in the next three years out of the $8.3 trillion outstanding."

That's more than 60% of our total outstanding debt, with much more being anticipated from increased deficits in the coming years.

Trennert also tells us that the current weighted-average funding cost is 1.21%- an absurdly low rate for the condition of the US government's financial situation. Much of that ultra-low rate is due, no doubt, to two factors. One, the massive holdings of US dollar-denominated debt by global investors, so that they can't easily just stampede out of dollars. And the lack of a viable, liquid alternative of sufficient capacity to absorb inflows if/when dollars are dumped.

Trennert notes, sagely,

"But the time to secure long-term funding is when you can and it is mildly expensive, not when you have to and the costs are exorbitant."

Or worse, you have to, and there is no cost at which you can extend your debt maturities.

To begin cutting our debt levels, the US will have to either save more, invest less. Both of these will slowly erode our GDP growth rates.

But continuing to rely on global investors to absorb ever more US debt with no end in sight is foolish.

Our current administration may, or may not, as Trennert points out, be using short-term funding to disguise the real costs of debt. But reliance on such short-term funding is ill-advised and too risky when betting on the ability to continue to place US debt while increasing its deficits.

But recent average 5-year note rates are 3.77%, roughly triple the current weighted-average, which would add $133 billion to the US government's annual interest rate bill.