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Federal Reserve SOMA Holdings of the Long Bond

It is well known that the Federal Reserve in its three rounds of QE (and especially the first two) aggressively bought Treasury Notes and Bonds or collectively the ‘Long Bond’ of 10 Years and longer. But there has been relatively little discussion of what that means for such things as Federal Government Net Interest etc. So rather than advance my thoughts I figured we could start with the numbers in the following web tool:
System Open Market Accounts

The link should take you to the Summary Tab which shows that total holdings in these accounts are $4.221 trillion comprised of $1.738 trillion of MBS’s (Federal Mortgage Backed Securities) and $2.347 trillion in Treasury Notes and Bonds plus some smaller amounts in TIPS and Agency Securities that are more a rounding error in context. Of interest is that the Fed’s SOMA holds no T-Bills at all. That is the holdings are all Medium to Long (2 years and longer) and not Short (1 year or less).

If you click on the Notes and Bonds tab you will see a breakdown of Fed SOMA holdings of each issue. Now while Notes and Bonds are not individually labelled it is easy to distinguish 10 Year and shorter Notes and 30 Year Bonds simply by inspection of the relative coupon rates of different Treasuries maturing on the same date: rates above 6% being Bonds issued 15, 25, and 30 years ago and rates in the 1-3.5% range being mostly 10 Year Notes. If we then inspect Fed holdings of those higher yield Bonds we see that they comprise up to but never exceeding 70% of the total issue.

I’ll let you all inspect the Tables as you will but would like to ask a question. The numbers show that the Fed’s SOMA holds something like 2/3rds of ALL existing high yield Treasury Bonds. Which means that these accounts are also collecting that percentage of projected Net Interest going forward for that part of Federal Debt actually held in Bonds. Since the Fed has no need to ever sell those holdings against its will and can simply hold them to maturity and since it rebates ‘profits’ to Treasury this would seem to mean that simply examining Net Interest in either nominal terms or as a percentage of GDP will lead one to erroneous conclusions about the ability to the Government to service its debt. That is just examining the total for Public Debt and taking its average coupon doesn’t do much until or unless you segregate out both Intragovernmental Holdings AND the Fed’s SOMA holdings and THEN adjust for the fact that these holdings include up to 70% of the highest yielding instruments.

I have put up these numbers before but as usual had the comment threads hijacked into other channels (cough, cough **Social Security** cough). But I really really hope SOMEBODY will address these issues more directly in terms of macro finance.

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Social Security under ‘Sustainable Solvency’: Debt & Deficit Revisited

The current Chief Actuary of Social Security is Stephen Goss and on the occasion of the publication of the 75th Anniversary issue of the Social Security Bulletin he contributed what may be the most valuable single piece you will ever read on Social Security financials. The article carried the title The Future Financial Status of the Social Security Program The abstract/teaser for the article starts out with this:

The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood.

To which I can only add “Boy Howdy!”
Steve is perhaps best associated with the concept of ‘Sustainable Solvency’ which he describes as follows:

Sustainable solvency requires both that the trust fund be positive throughout the 75-year projection period and that the level of trust fund reserves at the end of the period be stable or rising as a percentage of the annual cost of the program.

Well this requires some unpacking. Under current law the Social Security Trust Funds are considered ‘solvent’ if they have a Trust Fund balance equalling 100% of the next years cost at the end of a given actuarial period. Stronger versions of this would require that the Trust Fund meet this standard in every year of the period and/or that it be trending upwards at the end. That is Steve’s “stable or rising”. Well all that is reasonable enough, but what would it look like under standard budget scoring? Well the answer is either “kind of odd” or “mind-bending”. Which will be explored under the fold.

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U.S. Federal Intergenerational Debt: Rendered and Layered

It is a common trope among Austerians that the U.S. is passing on unsustainable debt to our children and grandchildren. And certainly there are some scary numbers out there, for example “$17.4 trillion!!” A very real number. But maybe it would be useful to render that number down so as to calculate real incidence of that debt and debt service within and between generations. With some real numbers and associated tools. With commentary mostly defered until (duh) Comments.

Total U.S. Public Debt (to the Penny)
http://www.treasurydirect.gov/NP/debt/current
Public Debt: $17,472,131,682,925.49 in turn the sum of:
Intragovernmental Holdings: $4,992,508,245,067.06 and
Debt Held by the Public: $12,479,623,437,858.43

Now for reasons that can be explained in Comments there is no need to actually pay down Intragovernmental Holdings and instead reasons why the various accounts that comprise it should increase in nominal terms over time, so I am just going to ignore it for the purposes of this post.

Debt Held by the Public: $12,479,623,437,858.43
Almost all of this is held in a combination of Treasury Bonds, Notes, Bills and TIPS with the major balances being in the first two categories. The respective holdings can be seen in the following graphic with specific numbers available by hovering your cursor:
http://www.treasurydirect.gov/govt/charts/principal/principal_debt.htm
Treasury Bonds (20 and 30 year Securities): $1.463 trillion
Treasury Notes (1-10 year Securities): $8.034 trillion

So right away we can see that ‘Long Term Debt’ as a percentage of ‘Total Public Debt’ is $1.463 tn/$17.472 trillion or 8.4% of total Public Debt. But of course somewhere between a half and a third of current 20 and 30 year Bonds have maturities in the next 10 years meaning that the actual amount of Public Debt due in years 11+ is commensurately less than that number. (Precise number left to the commenters). Now of course this calculation ignores two factors: 1) rollover of shorter term debt and 2) debt service. So maybe we can address the second factor first:

Average Interest on Public Debt
http://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_04.htm
Total Marketable: 2.007%
Bonds (20 and 30 years): 5.011%
Notes (1-10 years): 1.808%

Okay those are the numbers. Implications, arguments and outright demagogery under the fold and in Comments.

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John Boehner says “we do not have an immediate debt crisis.”

Via Salon, David Sirota points to statements by John Boehner and Rand Paul:

America owes this debt of gratitude to Boehner after he finally came clean on yesterday’s edition of ABC’s “This Week” and admitted that “we do not have an immediate debt crisis.” (His admission was followed up by Budget Committee Chairman Paul Ryan, who quickly echoed much the same sentiment on CBS’ Face the Nation).

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