Rollover Risk in US Bond MarketSubmitted by Goldspan on Wed, 07/10/2013 - 20:29
75% of US Debt must be refinanced in the next 5 years
Bond market: Something Rick Santelli said yesterday that got no traction at all, but should not be over looked.
The point he makes starts about 2:10 on this video, He says the “The duration of the entire US portfolio is close to that 5 year maturity and then points out the “Fed doesn’t want to talk about it because of the cost to service the debt is going higher.”
sorry thats the best i could do with that, if you have trouble go to CNBC....look for closing bell exchange 3:00 pm 7-9-13
By my calculations a 5 year duration equals 75% of 17 Trillion dollars’ worth of bond are either going to have to be rolled over…..or new money raised……..this is a huge risk to our bond market, the dollar and our country.
Couple points here, even if we are able to rollover this amount of debt( and this doesn’t include the new money that must be raised to cover the deficit) the cost of servicing is going up and it’s going to break our backs.
Portfolio duration…..There are two different measures for duration
• Macaulay duration is the name given to the weighted average time until cash flows are received, and is measured in years.
• Modified duration is the name given to the price sensitivity and is the percentage change in price for a unit change in yield.
Rick is referring to the former when he states that the cost of servicing the debt is going higher. On an annualized basis that 46 basis points turn in to 78 billion dollars. So in just over a month the burden to tax payers have increased by quite a bit. We lets extrapolate this information out and see what kind of effect this could really have.
Everyone now talks about rate normalization because everyone knows that we cannot live on zero interest rates forever. So what does rate normalization look like. According to John Williams of shadowstats, the official CPI is about 1.5% and the pre 1990 measurement is about 5%. So we will split the difference and call it 3.5%. So the gets us just to what called a real interest rate of zero (real rates are neither positive nor negative on a real after inflation basis). Under normalization there then needs to be a risk premium added to the nominal rates of 3.5%. Typically this risk premium might be somewhere around whatever the real GDP growth rate is at the time, So let’s call it 2.5% to get to a nice around number of 6%.( so this would be the ten year rate……the 5 year rate would be about 2/3 of the ten year or 4%) Stated another way I could have told you that the 10 year rate normalization could be about the same as nominal, GDP growth but I wanted to give you some basis on how I came up with these numbers. Current 5 year rates are about 1.5%, but added 78 billion dollars to debt service for a 50 basis point move. Another 250 basis point move could add close to another 400 billion dollars to our debt service. So all the phony accounting tricks Washington is using right now will only make things worse, because they are doing these things to make it appear that things are getting better…….it not…..and it’s not going to.
Do you know what the weighting of a 17 trillion dollar portfolio would have to look like under the current interest rate environment to have a 5 year duration? 13 trillion of the 17 trillion of debt has to have less than 5 years maturity.
If for no other reason all of them in Washington should be impeached for this. Why in the world would any financial entity capitalize itself with so much short term debt while the interest rate structure across the board is so low? Why wouldn’t they stretch out the terms of their debt structure to as far as possible…..well in this case because they can’t…… no one would buy the debt……….This is how banks get in trouble……borrowing short and lending long…. This thing could get so ugly so fast because of this “rollover risk”. I have always said the turning point will be when we can no longer service our debt…..and it may be upon us with rate normalization.