After the Federal Reserve radical hike rate , many people have a question, that is, how much interest does the United States have to generate in a huge debt of up to 31 trillion US dollars each year? After the aggressive interest rate hike, how much interest will be increased every year?
How much does the Federal Reserve have to raise interest rates so that the United States can’t afford high interest rates?
, and the Federal Reserve is currently accelerating to reduce the balance sheet.
From September 13 to October 4, the Federal Reserve's balance sheet shrank from US$8.832 trillion to US$8.759 trillion, shrinking by US$73 billion, which is relatively close to the upper limit of the Federal Reserve's monthly balance sheet shrink of US$95 billion. Compared with the previous two months,
has only reduced its balance sheet by about US$30 billion per month, which is obviously an acceleration trend.
So how long can the Fed balance sheet shrink?
Regarding these issues, this article will do an in-depth analysis. Everyone is welcome to like and support.
(1) The composition of US bonds
To understand the limits of The Federal Reserve's interest rate hike , then first of all, you must understand the specific composition of US bonds.
The Federal Reserve raises interest rates and will not immediately increase the interest paid by the US government significantly.
bond interest rates are fixed when issued and will not change due to the Fed's interest rate hike and interest rate cut.
is the bond yield, which will change in real time.
Therefore, the Federal Reserve's aggressive interest rate hike will significantly increase the cost of issuing bonds in the United States.
But the Fed's interest increases, there will be a lag effect.
will have to wait for the huge US stock of low-interest bonds to gradually replace them with high-interest bonds, and the interest paid by the US government will increase significantly every year.
This is a process.
From the figure below, you can clearly see the changes in the interest paid by the United States every year.
According to FRED data.
In 2015, the United States paid $434.6 billion in interest.
in 2019, it grew to US$591.6 billion.
In 2020, the annual interest payments of the United States dropped to $528.7 billion due to the Federal Reserve's interest rate dropping to $0 and printing unlimited money.
In 2021, as the yield on the US 10-year Treasury bonds began to rise, the interest paid by the US also increased to $600 billion.
As of the second quarter of this year, with the Federal Reserve aggressively hikes interest rates, the interest paid by the United States also increased to $648.4 billion.
So, the Fed's interest rate hike will not suddenly turn the US $31 trillion in stock debt into high-interest bonds.
But as the United States continues to borrow new and repay old , more and more low-interest bonds are gradually replaced with high-interest bonds, and the interest to be paid by the United States will gradually increase.
I mentioned before that it will take at least 2-3 years for the United States to replace most of the low-interest bonds in its hands with high-interest bonds.
In other words, the time when the Federal Reserve aggressively raises interest rates is about 2 years. If more than two years are spent, the US government may not be able to afford high interest rates.
Let’s look at a set of data in detail.
The United States issued about $14 trillion in bonds in 2019.
, and in 2020, bonds were issued to $20 trillion.
The additional $6 trillion in bond issuance is that in 2020, the United States raised $6 trillion in debt in one go, and increased the total amount of government bonds from $22 trillion to $28 trillion.
Since the current fiscal deficit in the United States basically exceeds 1 trillion US dollars every year.
This makes the US government only able to repay a large number of maturing bonds every year by borrowing new and repaying old models.
Before 2019, the United States basically issued more than $10 trillion in bonds every year, most of which were used to borrow new and repay old debts, and the rest was net increase in debt.
In 2021, the total amount of U.S. bond issuance reached US$17.7 trillion.
In 2020 and 2021, the United States issued debts crazily for two consecutive years.
This is because the Fed had dropped to 0 interest rates at that time and was unlimited quantitative easing.
This leads to generally low yields on U.S. bonds.
In 2020, the average yield of US long-term bonds should be only within 0.5%, and short-term bonds are even at 0 interest rates.
So, the United States issued debts crazy at this time, which was quite a bit like accumulating winter food in advance.
I also used this to analyze it last year. The United States’ crazy issuance of bonds in a low-interest rate environment further indicates that the Federal Reserve will soon turn a major currency.
Because if the Fed will maintain a 0 interest rate for a long time, the US government does not need to be so anxious to issue bonds, so it can be issued slowly.
But the United States has issued debts for two consecutive years.
This shows that the United States has long been ready to make a major currency turn this year.
Last year, the Federal Reserve broke the temporary discussion on inflation, just saying lies and fooling the market.
After the Fed raised a sharp interest rate this year, the speed of the Fed's bond issuance has slowed down significantly. In the first seven months of this year, the United States' net increase in Treasury bonds was US$765.9 billion.
This is an increase of 8 trillion US dollars compared with the previous two years, and the bond issuance rate has slowed down significantly.
At the same time, the United States issued a total of US$9.4 trillion in bonds in the first seven months of this year. If calculated according to this bond issuance rate, the total annual bond issuance is 16.11 trillion.
Considering that the US net increase in Treasury bonds this year is about US$1.3 trillion, which means that the scale of US debt maturity this year is at least US$14 trillion.
Therefore, the United States must issue a large number of bonds to maintain the model of borrowing new and repaying old ones.
. After the Fed began aggressive interest rate hikes in March, the cost of issuing bonds in the United States this year is much higher.
If the US cumulative bond issuance this year reaches a scale of US$16 trillion, it will almost be to replace half of the existing bonds with high-interest bonds.
Next year, more than 80% of low-interest bonds in the United States will be replaced with high-interest bonds, and the remaining part will be medium- and long-term bonds with a maturity of more than 3 years.
The average interest rate of US bonds this year is about 3%. By the end of this year, after half of US bonds were replaced with high-interest bonds, it is estimated that the interest the US has to pay this year should be between 700 billion and 800 billion.
Next year, if the United States maintains a high interest rate of around 4.5% throughout the year, but the remaining half of the low-interest bonds will also take some time to replace them with high-interest bonds next year.
Therefore, it is expected that the interest the United States will pay next year will reach about $1 trillion.
The key is that if the Federal Reserve continues to maintain an interest rate of around 4% in the following year, because most of the US bonds are replaced at this time, it is expected that the interest paid by the US in the next year will reach about 1.2 trillion US dollars.
The Federal Reserve maintains the current high interest rate, so the interest the US government has to pay will increase by about $200 billion each year.
The fiscal revenue of the United States in the current fiscal year is about US$4.5 trillion.
fiscal expenditure is about US$5.5 trillion.
fiscal deficit level is US$1 trillion.
At this fiscal deficit level, the United States will increase its debt by at least $1 trillion a year.
As debt continues to increase, if high interest rates are maintained for a long time, it means that US debt will continue to increase in snowballs, and the interest paid every year will continue to increase.
According to the above calculation, if the United States continues to maintain a 4% interest rate by 2024, it will pay $1.2 trillion in interest every year, which has accounted for 1/4 of the U.S. fiscal revenue.
This is a pretty exaggerated level.
interest continues to increase, which means that the fiscal deficit will continue to increase.
This will in turn force the US government to increase its efforts to issue bonds, which can be said to be completely unable to stop.
, and it is currently the Federal Reserve's balance sheet reduction cycle, as the Federal Reserve is accelerating its balance sheet reduction and is not buying bonds.
The US government's continued issuance of bonds needs to be digested by market investors.
So can market investors absorb such a huge scale of US bond issuance?
obviously doesn't work.
So, as long as the Fed maintains its balance sheet reduction, the pressure on the US bond market to collapse will exist.
(2) The main investment groups who are buying US bonds
US Treasury bonds can be roughly divided into 4 categories: Federal Reserve, Pension, US Government, and foreign investors.
Among them, the Federal Reserve holds US$5.64 trillion in US Treasury bonds, accounting for 18.5%.
Then the U.S. government held US$6.66 trillion in U.S. Treasury bonds, accounting for 21.8%, more than the Federal Reserve held.
The US Treasury bonds bought by the US government are non-tradeable Treasury bonds, mainly for the government account series of securities, and the holders behind them are government trust fund , working funds, turnover funds, etc.
In addition, it is the US pension, which holds US Treasury bonds by about 10.5%, second only to the US government and the Federal Reserve.
So, we can see that the US government, the Federal Reserve, and the US pension, together, accounts for half of the current 31 trillion US Treasury bonds, which is the main buyer of US Treasury bonds.
In addition to the United States, foreign investors purchased US bonds at US$7.43 trillion, accounting for 24.3%.
In addition, there is another main purchaser of US bonds, mutual fund , which is the US Treasury bond purchased by money funds in the US market, holding approximately US$3.6 trillion in US bonds.
These are the main purchasing entities of US bonds. In addition, the proportion of US bonds purchased by individual investors in the United States is only 4.4%, and the proportion of US bonds purchased by insurance companies is only 1.9%.
is not too big.
So, after the Fed reduced its balance sheet, the largest buyer of US bonds stopped buying at once.
The remaining other purchasing entities are the ones. The US government and pensions will definitely not expect them to increase their efforts to purchase US bonds. Mutual funds look at the scale of money funds. As the Federal Reserve raises interest rates, the scale of money funds will further shrink.
In fact, the current scale of mutual funds holding US Treasury bonds has decreased by US$142 billion compared with the end of last year.
Therefore, if the United States wants to increase the scale of taking over the purchase of US bonds, after the Federal Reserve raises interest rates and reduces its balance sheet, local funds will no longer be expected, and the United States can only rely on international funds.
In fact, foreign investors, which account for 24.3% of the total, is the main source of credit for US debt.
As long as foreign investors are willing to buy US bonds, the credit of US bonds will still be there and the credit of US dollar will have a basis, because the US dollar is basically anchored in US bonds.
The credit of US debt is anchored in the national strength of the United States, or in other words, the United States' military hegemony and technological hegemony.
However, with the Fed's aggressive interest rate hike and balance sheet reduction, foreign investors are not stupid, and the overall share of holding US bonds has also decreased a lot compared to before the epidemic.
For example, we and Japan have significantly reduced their holdings of US bonds by hundreds of billions of yuan this year.
Then European funds increased their holdings of a lot of U.S. bonds.
This is the result of the United States' fire in the world, constantly driving international safe-haven funds back to the United States and taking over US bonds.
If the United States did not make a fuss, it would probably be even stronger for the US bonds to collapse now.
So, in general, although the United States is trying hard to create a crisis, under the Fed's aggressive interest rate hike and balance sheet reduction, it cannot reverse the collapse of US bonds, and can only delay it slightly.
I have been saying last year, don’t underestimate the Fed’s determination.
I don't think the Fed will cut interest rates next year.
The United States’ harvest of the whole world is not very effective now, so the United States will have to maintain at least one year of interest rate hike cycle next year.
At the same time, this is almost the limit of the United States.
If the Fed does not cut interest rates in the next year, the US government may face interest rates up to $1.2 trillion, which will indeed be unaffordable for the US government.
But the United States should be able to barely hold on next year. The Federal Reserve may still maintain the interest rate hike cycle next year, but it may slow down the pace of interest rate hikes and maintain interest rates at a level of 4.5% to 5%.
This is a conservative expectation that does not consider the occurrence of some black swan events .
Regardless of whether the United States can successfully harvest next year, the Federal Reserve may cut interest rates in 2024 because it has reached the limit of the United States.
At the same time, in order to allow the US bond market to last longer, the United States will still increase its efforts to fill the world with fire. We need to be prepared for this.
I am Star Talk Dabai, welcome to like and support.
