The main question for the next six months is whether the placement of over 1 trillion in government bonds over two years will succeed or fail. This is not as trivial as it seems.
Since June 2023, the primary placements have been in bills backed by reverse repurchase agreements with the Fed, which have declined by almost 2 trillion over the year, with 1.9 trillion in bill placements.
Since March 25, the Treasury began repaying bills (233 billion through May 2) thanks to the budget surplus in April and an accumulated cash position of 0.8 - 0.9 trillion.
Comparison with Previous Periods of Quantitative Easing
There was a bond replacement procedure in 2021, but it was influenced by excess liquidity and quantitative easing (QE) from the Fed of 4.5 trillion over two years, whereas now it is quantitative tightening (QT), so the conditions are not comparable.
Current Debt Composition
By our calculations, the current US government debt looks like this (as of April 30, 2024): bills - 5.87 trillion, notes - 13.96 trillion, bonds - 4.51 trillion, TIPS - 2 trillion, FRNs - 0.55 trillion, totaling 26.9 trillion. This is considered market debt; all other liabilities are domestic and not part of US market debt.
Data on weighted average debt service costs will be released later this week, but our preliminary calculations put the annual cost of servicing market debt at nearly 890 billion - the actual cost to the U.S. Treasury.
Last year, the US Treasury chose the path of least resistance by placing bills as the most affordable method, with 2.3 trillion of excess liquidity placed in reverse repurchase agreements. That approach will not work now.
Next year, 5.9 trillion in promissory notes are expected to be redeemed.
Conclusion
The U.S. Treasury is undertaking a significant shift from short-term debt to medium- and long-term government bonds, a strategy in stark contrast to last year's bet on short-term bills. This reallocation, involving more than $1 trillion in bonds over two years, comes during a difficult period of quantitative tightening, in contrast to the previous period of quantitative easing when federal support totaled $4.5 trillion. The success of this move is critical because it comes against a backdrop of declining bill issuance and changing economic conditions, with the Treasury's debt service costs projected to be about $890 billion a year. The outcome of this complex fiscal maneuver will be critical to shaping the fiscal stability of the U.S. government in the months ahead.