Treasury: More Borrowing, Less Short-Term

by: Donald Marron

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:

Debt MaturitiesAs 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.