U.S. Debt Maturities: Evidence Of Looming Default In U.S. Bonds

Includes: DTYL, TLT
by: Katchum

While many investors want to believe that U.S. treasuries (TLT, DTYL) are a safe haven, I will use this article to debunk that myth with plain hard evidence. I believe holding U.S. bonds is the worst investment going forward.

Let's take a look at the graph about debt maturity (Chart 1). It tells us that most of the U.S. debt is short-term debt payable within 5 years. The scary part is that it is a huge amount of debt that needs to be repaid (around 1-2 trillion U.S. dollar short term). $900 billion is to be paid after 1 year, $750 billion is to be paid after 2 years, $450 billion is to be paid after 3 years, etc... Even more scary is that the U.S. treasury isn't so transparent about the debt maturity report. Chart 1 is published in February 2010 and hasn't been updated lately. Also, Ben Bernanke is allegedly trying to make us believe that most of the debt is long term, which it is not (source: Ben Bernanke at Fed meeting on 7 June 2012).

Chart 1: U.S. Treasury Debt by Year of Maturity

At the end of June 2011, foreign holdings of short-term debt (less than 1 year) was $881 billion. If we look at Chart 2, we see that fed holdings of U.S. treasuries was $130 billion at the end of June 2011. This indicates to us that most of the short-term debt (87%), is held by foreigners (which is the most crucial and important debt). Peter Schiff pointed this out on June 8, 2012 on Schiff Radio. The reason short-term debt is most crucial, lies in the fact that interest rates will rise. They can't be kept low when a country is in a default. For example, in Greece, short-term debt securities have higher yields than long-term debt securities. This is also why Marc Faber indicates that one day, foreigners invested in U.S. debt, will not be paid back. This is because they are holding all the short-term debt, while the fed is holding the long-term debt.

Chart 2: Fed Holdings of U.S. Treasuries (billion US dollar)

Let us now take a look at the average maturity date of the debt portfolio (Chart 3). It tells us that the U.S. was in real trouble during the financial crisis of 2008, where debt maturity hit an all-time low of 4 years. Imminent default was looming in that period. Today, the average debt maturity has risen to a high of 5 years, but it is still very low compared with other countries.

Chart 3: Average Treasury maturities

The United states has one of the lowest average debt maturities of the countries in the Organization of Economic Cooperation and Development (OECD) [Chart 4]. Even Greece has a higher maturity of 8 years according to the Debt Management Office. Low maturity increases the risk of default, because there is less time to roll over the debt.

Chart 4: Average Maturity of Domestic Debt in Years (OECD)

Now add to these facts that treasury yields are at a 30-year low today and you've got all the evidence of a bond bubble in the United States.

It is difficult to time when the bond market will collapse, but I wouldn't speculate on it. Just stay out of it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.