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The yield on the Treasury Five Year Bond has dropped like a rock from a recent peak of 4.35% March 9th down to 3.6% this morning, as market participants run to safety and drive up bond prices. Ten and thirty year bond yields are also down recently, though not as dramatically.

News reports indicate that market participants and observers have changed what they expect the Fed to do next week due to the fears of contagion in the banking sector: prior to the collapse of Silicon Valley Bank and abrupt closure of Signature Bank expectations were that a 1/2 point raise was likely due to the persistent economic strength and inflation observed recently in the US, but now few think the Fed will raise 1/2 point, and opinions are split whether they'll raise 1/4 point or leave the Fed rate unchanged.

So far, from what I can see, there's not much reason to worry of a wider banking crisis, but I suppose I wouldn't know at this point if the issues causing the failures of SVB and SB were more widespread than is currently reported in the news. Those issues being: excess investment in long term Treasury bonds by SVB, leaving them strapped for cash with the value of their assets diminished by rising market rates, and high exposure to cryptocurrency assets for SB, many of which have withered in value this year, combined with a panic run caused by the SVB collapse.

The yield on the 1-Month Treasury Bill has dropped like a rock from a recent peak of 4.74% March 30th down to 3.36% today. All other Treasury yields are up slightly this month. (The 2-Month increased from 4.79% to 4.98%. The 10-year increased from 3.43% to 3.57%. A year ago, the 1-Month Treasury Bill yield was 0.50%.)

The total bids tendered did not change much, but the bids were much lower. Some competitive bids were 0%. Somebody needed 1-Month bills.

      auction       13-Apr  20-Apr
  accepted [$B]       61      51
bids tendered [$B]    186     152
  InvestmentRate    4.11%   3.25%
    MedianRate      3.97%   3.00%
      LowRate       3.50%   0.00%

https://www.treasurydirect.gov/instit/annceresult/...
https://www.treasurydirect.gov/instit/annceresult/...
https://treasurydirect.gov/auctions/announcements-...
https://wolfstreet.com/2023/04/20/short-end-of-the...

The drop in 1-month rates started in the secondary market around March 10th. There are 2 possible causes discussed in the comments following Wolf's article. One idea is that possibly in about a month there will be a debt ceiling crisis, and this might trigger massive stock market losses. Investors want cash available when that happens, and so only want to lock in 1-month of Treasury.

The alternative cause is businesses moving their cash from bank accounts to 1-month T-bills. Silicon Valley Bank failed after a bank run on March 10, 2023. I think this fits the data better.

In looking at some data related to the debt ceiling, I found the following links. I think federal interest outlays as percent of GDP is the canary:
around 1.5% from 1940 to 1978.
increases to 3.0 % from 1978 to 1985.
steady at 3.0% between 1985 and 1996.
decreases to about 1.5% from 1996 to 2002.
steady around 1.5% from 2002 to 2021.
probably headed higher.

The Federal Budget in Fiscal Year 2022: An Infographic, March 28, 2023
https://www.cbo.gov/publication/58888

FRED charts for U.S. federal outlays, revenue, deficit, debt, and interest as percentage of GDP:
https://fred.stlouisfed.org/series/FYONGDA188S
https://fred.stlouisfed.org/series/FYFRGDA188S
https://fred.stlouisfed.org/series/FYFSGDA188S
https://fred.stlouisfed.org/series/GFDEGDQ188S
https://fred.stlouisfed.org/series/FYOIGDA188S

Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity
https://fred.stlouisfed.org/series/DGS5

Going forward, most of the change in the federal U.S. deficit will be from interest, Social Security, and Medicare.

CBO projections of 25-year changes:
larger deficit 6.1% of GDP
more interest 4.6% of GDP
more Social Security 1.4% of GDP
more Medicare 2.6% of GDP

CBO projections for the next 25 years are (percent of GDP, 2022 to 2047):
revenues decrease: 19.6% to 18.9%
outlays increase: 23.5% to 28.9%
larger deficit: -3.9% to -10.0%
interest increases: 1.6% to 6.2%

contribution to the Federal Deficit:
Social Security: -0.4% to -1.8%
Medicare: -1.5% to -4.1%

https://www.cbo.gov/publication/58340

Thanks for the series of posts, lizgdal. Interesting stuff.

The 25 year projections are derived from currently enacted policies projected forward. But policies change on a regular basis so there's no reason the think we'll actually hit those numbers.

I think most agree that we can't just keep raising the deficit as a percentage of GDP: a deficit of 10% of GDP is something that should only happen in times of extreme fiscal duress. One way or another we'll work out some compromises to get that projected deficit in 2047 down substantially.

The strangeness continues. Today's auction of 4-week T-bills resulted in an Investment Rate of 5.964%. Last week's result was an Investment Rate of 3.905%. Over 2000 bps move in one week. Large amounts of money are sloshing around trying to find a new home. And the debt ceiling X-date is about 4 weeks away, around June 1st.

https://www.treasurydirect.gov/instit/annceresult/...
https://www.treasurydirect.gov/instit/annceresult/...

The strangeness continues. Today's auction of 4-week T-bills resulted in an Investment Rate of 5.964%.

That's because people are afraid of "technical default" so they don't want to be in bills that cross that timeline. I, on the other hand, am very happy to be in bills that pay more due to others' fear. I doubled my allocation (I buy all the treasury bills each week when the rates are attractive) to these bills last week because I suspected that the fear would cause somewhat higher rates. In fact, I would be extremely happy if these DON'T mature on time and they pay me 5.964% for an extra few days while Congress wrangles a bit more.

There's unlikely to be a default, anyway, unless Yellen and Biden choose to violate our Constitution with their "priorities." The government is required to pay the national debts, and there's plenty of tax revenue under current tax law coming in to make the existing interest and principle payments--thus, no default. There's plenty of revenue left after that to make the military's payroll, and after that to make the existing Social Security and Medicare payments.

It's government contract payments that would be at risk, and that would be embarrassing enough as well as damaging to our real economy. Whether DoD contracts (or which ones) would fall here or fall under provid[ing] for the common Defence could make for some interesting court cases.

Eric Hines

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