The Bill Is Finally Coming Due

The ghost of 2007 is back. And this time, he brought a friend—the ghost of COVID. Together, they’re going to haunt your wallet.

In fact, the haunting is already showing up… but we’ll come back to that in a bit.

The US faces an enormous financial challenge over the next year, and nobody is really talking about this yet. To understand what’s coming—to understand the ghosts—we have to step back in time to 2020, the Year of COVID. The year the economy simply stopped.

To try to save the economy from total implosion, the Federal Reserve cut interest rates to essentially zero—the cheapest money in American history.

What nobody ever seemed to talk about is that COVID was actually a missed opportunity for the US government—a once-in-several-generations chance for a prudent Treasury Department to lock in cheap financing with 30-year bonds that at the time were going out at 1.5% yield.

Instead, Treasury officials pulled a page from the homeowner playbook, circa 2005: Take the short-sighted path and lock in ultra-cheap financing for the short-term. Worry about the long-term later.

I understand the logic, to a degree. When you’re already downing in debt, the cheaper adjustable rate mortgages(ARM)-like rates are more attractive, even if they are going to come back to bite you in the rump.

So, Treasury chased short-term money: Two-year, five-year, and 10-year paper—some of it below one percent.

Which brings us to the Ghost of 2007…

Interest rates rose, and millions of American families found out the hard way that they’d screwed themselves by chasing those alluring short-term rates. As adjustable-rate mortgage adjusted upwards, mortgage payments doubled from one month to the next… families lost their homes. Banks collapsed.

That’s the thing about cheap money: It always has a dark side, which the US government is going to find out over the next year.

10-year Treasury notes that were issued in 2016/17 are now coming due. They were first issued at rates of between 2.2% and 2.4%.

COVID-era seven-year paper that was issued with rates in the half-percent range are coming due now as well.

And all of that debt will roll over at rates of between 4% and 5% today … roughly 2x to nearly 10x higher than their original rates.

Just last month, the Treasury Department auctioned $52 billion worth of new 10-year notes at 4.47%. Those were replacing $28 billion worth of 10-year notes issued back in 2016 at 1.7%.

Earlier this month, the Treasury auctioned $58 billion worth of three-year notes. They cleared at a yield of 4.192%—22.7 basis points above the prior auction’s 3.965%. Plain English: In the span of a single, monthly auction cycle, the interest rate the market demanded to lend money to Uncle Sam for a measly three years jumped by nearly a quarter of a percentage point.

But that is exactly how the bond market communicates—not with words, but with yields. Global bond investors showed up in fewer numbers and those who did show up demanded a greater yield to take on the risk that is the American government today.

If you’ve been reading Field Notes for a while, you might recall that I’ve often said this day was coming… that global bond investors were going to start skipping US Treasury auctions and that those who show up are going to force the Treasury to pay higher rates.

And here we are…(I’ve a few more predictions for things that are coming up as we barrel towards the midterms… It’s also one of the reasons we’re gathering in Dublin this October for the Future of Wealth Summit. Many of the trends I’ve been writing about for years—rising debt burdens, weakening confidence in the dollar, and the global search for alternatives—are no longer theoretical. They’re happening now. The question is no longer whether they’re coming, but how best to protect yourself and position your wealth accordingly.)

Yes, these were both relatively small transactions. But the impact is real dollars. Lots and lots of real dollars.

That 10-year note that went off at 4.47%… the cost difference: $775 million dollars in additional interest payments every single year, or nearly $7.8 billion over the next decade.

Carry that across trillions of dollars of debt coming due and the hit to the US government is seriously consequential.

It’s the exact situation homeowners faced 20 years ago. Rates adjusting higher destroyed their lives.

Granted, the US government won’t be destroyed, but it will bring America that much closer to the reckoning that’s coming.

In 2020, the US paid $345 billion dollars in interest on its debt.

That number already crossed $1 trillion this year and we still have four months before the federal fiscal year ends in September.

The families with suddenly unaffordable adjustable-rate mortgages in 2007 had an exit. They could just walk away from their debt. But government has no exit, other than a default… and that would collapse the global economy.

The Fed cannot come to the rescue this time with a series of rate cuts when inflation just crossed 4.2%. The global bond market would revolt because a rate cut right now would signal that new Fed Chair Kevin Warsh is letting politics determine interest rate policy rather than economic data… and if the bond market senses that, well bond investors are going to push Treasury rates sharply higher to compensate for the even-greater sovereign risk they see in America… and that will impose even greater inflation on American families. 

Then again, do nothing and hope for the best, and America still faces sharply higher borrowing costs simply because today’s interest rate environment and the inflationary urge that is, well, already compelling bond buyers to seek higher yields on the very debt that impacts consumer and business borrowing costs.

While this seems like an Uncle Sam problem, truth is it’s a You Problem too… But if you’re here reading this, you’re clued in. You know what’s coming. And if you’ve been paying attention, you know what to do about it—insulate, diversify. Get all of your eggs out of the dollar-only basket that’s held together with thoughts and prayers and a bit of Elmer’s glue and Bubble-Yum.

I will keep saying this until there is no longer a need to: Gold and Swiss Francs—these are the assets that will afford you protection from what’s coming.