Buyers of U.S. debt come in many shapes and sizes.
I think we can all agree that there has been plenty to be concerned about in the last, say,
five years. Some are environmental issues, some are social and, for community bankers,
plenty are economic. What gets a lot of play in the business and even mainstream media
is our growing national debt. There’s no doubt that the mountain of borrowings that
keeps our federal government liquid and solvent is greater than ever before. It’s not
surprising to me that there’s spirited debate about debt limits, or if Congress will ever in
our lifetimes find a way to slow our dependence on deficit spending.
Related to this conversation is the concern that, to paraphrase Blanche DuBois, we have
always depended on the kindness of strangers. It seems self-evident that foreign central
banks have propped up our debt market for decades, buying dollar-denominated
securities by the trillions, thereby keeping our borrowing costs manageable, and
potentially even encouraging our bad behavior by going ever deeper in debt. But is any of
this true?
Walked, then ran
First, let’s try to get our minds around the situation. The Federal government first
borrowed money before there was a Federal government, when the Dutch and the French
loaned money to the Continental Congress to help finance the Revolutionary War.
Treasury borrowings, as we know them today, sort of date back to World War I, with the
issuance of “Liberty Bonds,” which was just after the creation of the Federal Reserve
Bank. As we have seen, the Treasury and the Fed have a long history of collaboration.
Even at the start of the 21 st century, total Treasury debt was “only” $3 trillion, at a very
manageable 30% of GDP. Just four years ago, our borrowings were about $17 trillion, at
77% of GDP. Today? We’re over $24 trillion, nearly 100% of GDP. While it would be
tempting to blame a lot of the more recent growth on COVID and the fiscal response to
that, the reality is each administration of the last quarter century has contributed to the
current debt stockpile. And, now that rates are at a 15-year high, our interest payments
alone are now over $900 billion per quarter. As Craig Dismuke, market strategist for
Stifel, is fond of saying, “Interest is an expenditure that doesn’t create jobs.”
Bedrock option
Now, for some hopeful commentary. The owners of our Treasuries are a diverse lot, with
diverse objectives. Investors include the savings bond/retail buyers, institutional money
managers who run mutual funds, depositories, our central bank, and yes, other sovereign
central banks. What’s interesting to note is that the percentage of our debt owned by
China, Japan, Germany and the rest of the foreign investors has declined substantially in
the last decade, from about 42% to less than 30%. The Federal Reserve, meanwhile, has
picked up the pace, and has essentially absorbed the pro-rata share of the pie in the last
decade. So it would be wrong to conclude we’re hostage to foreign governments’
largesse. Still, that leaves around half of our total debt in the hands of private investors.
Who are these people? Most are names you’ve heard of, and maybe even invested your
personal or retirement moneys with. Large mutual fund families, state-sponsored
retirement funds and life insurance companies are examples. In aggregate, they have
owned nearly half of the total debt pie for most of this century, so their collective appetite
for full faith and credit investments has mirrored Uncle Sam’s appetite for more
borrowing. A lot of this can be attributed to the aging of the population, and the advent of
“targeted date” funds.
Keeps the wheels turning
If you’re of a certain vintage, you may already be invested in these vehicles. Targeted
date funds are built for individuals who have an eye on a retirement date, whether it’s
five or fifteen years from now. Each fund will gradually reallocate its assets out of riskier
sectors (e.g., equities) and into debt securities (including Treasuries) as the target date
approaches. Collectively, retirement funds (and individuals acting on their own) that
gradually, systematically, add more Treasuries to their portfolios may continue to keep up
demand to absorb the ever-increasing supply.
So how does this rubber hit the road for Main Street? For starters, demand for U.S. debt
helps keep a lid on our Federal deficit by subsidizing interest costs. It probably also keeps
community banks’ net interest margins a bit lower than otherwise, even if most banks’
portfolios contain no Treasuries at all. Still, the global need for Treasury bills, notes and
bonds may just possibly sync up with our growing deficit, and ultimately be supportive,
long-term, of commerce as we know it. Unlike DuBois, the U.S. Treasury doesn’t depend
on the kindness of strangers; rather, the global need for safe, liquid debt securities.