A Detailed View At The Maturity And Duration Distribution Of US Treasurys, And How The Fed Has Found Itself In Another Catch 22
As part of today's refunding announcement, the US Treasury provided a link to much needed monthly detail of the curve maturity profile. Below we present the two key charts.
The first, present the average monthly maturity for the entire curve. As can be seen by the blue line, even as the average maturity plunged to an all time low below 50 months in late 2008, this has since been increasing and the current 59 month average maturity is not only the highest it has been in over 6 years, but is higher than the 10 year average of 58 months. A preliminary conclusion is that issuance is finally normalizing, and that investors are no longer focused on seeking the safety and liquidity of ultra short-term rates. Yes and no. A far greater driver is the yield on the 5 Year Bond (red line presented on an inverted axis), which as can be seen has plunged to an all time low of just over 1%. As such, investors have been pushed from chasing liquidity to chasing yield, which in itself explains the eagerness of purchasers to move to the right of the curve. This in itself is a major risk: while the Fed's actions can control the near-end of the curve, when it comes to the curve belly, the Fed is far less effective using traditional policy, and is forced to outright buy the bonds. Which explains why yields are where they are. The issue is that when (if) QE ever ends, the rush away from even the 5 year spot on the curve will result in a major shift in maturity lower, and the Treasury will have no choice but to refinance rolling debt with ultra-short term debt, until the entire curve is grossly skewed toward Bill holdings in an attempt to avoid an interest payment explosion.
And here is the other, probably even more important, chart which breaks down the entire marketable debt curve, demonstrating how much debt matures in any given amount of time. Not surprisingly, on a relative basis, just 10% of the entire $8.5 trillion in debt as of September 30, only 10% matured in over 10 years. What is notable is the drop in debt maturing in under 1 year, which is now down to 30%, the lowest in a decade.
Again, as above, the only reason for this is the need to chase yield ever further to the right. The second there is any steepening in the curve, aka an improvement in the economy, there will be a rush to flee all positions, forcing Treasury refis to focus ever more to the left of the curve until it hits Bill (<1 Year) land. Which once again bring us to our original hypothesis, that it is not a failed auction as an actual rise in yields that is the colored swan.
In fact, in an ironic twist, the Fed has once again found itself in a catch 22: the second the curve stops flattening, especially in the 3M-5/7Y sector, whether due to the end of QE2-XXX, or due to actual, legitimate economic improvement (and you would see it here first, nowhere else), the interest paid on US debt will surge, and the Fed will have no choice but to roll all expirations into bills, creating a Frankenstein of a monster in which the entire US economy will live bill auction to bill auction, until even the rate on Bills become unsustainable.
Source: US Treasury