The Fed's QE Exit Will More Than Quadruple Interest Costs For The US

Tyler Durden's picture

With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead.  While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

As TBAC warns:

Treasury yields could reprice notably when the market is convinced that policy tightening is imminent

There is a risk that markets may overshoot to higher-than-fair yield levels due to:

  • Concerns about Fed portfolio unwind
  • Inadequate interest hedging in certain asset classes
  • Portfolio rebalancing by retail investors

Annual interest cost on public debt to increase more than 400% (from $205 bn in 2013 to $855 bn in 2023)

  • Main driver : Increase in WAC from 1.7% to 4.3%
  • Secondary factor : ~ 65% increase in stock of debt

Given the market's expectations for Fed tapering (or gradual tightening)...


The marginal cost of financing will rise significantly...


but with the sheer size of debt now (and growing), that will balloon the absolute cost of servicing US debt to over $850bn per year...


And just what happens to all those retirees - who need yield - who are being herded into stocks when Treasuries pay over 4.5%? Would seem bullish for bond flows... think Japan...

Charts: TBAC

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Ham-bone's picture

Tyler said Fed QE exit- good one.

ratso's picture

Who said anything about an exit?

FL_Conservative's picture

"...weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years."


More like 10 days....if not 10 hours.

NotApplicable's picture

All I want to know is, what does Kevin Henry think about this?

rcintc's picture

We all know the track record of the CBO....they are always spot on.....


SamAdams's picture

if rates were to go up in a year or less, then that would remove dollars from circulation.  this would make the dollar worth more, therefore it would take fewer dollars to buy an ounce of gold.  we just saw a major sell-off in paper gold.  just something to think about.

Ham-bone's picture

Fed just laid out criteria to increase and stated we meet that, message received.

Of interest - Copper is on the verge of collapse again at $3.06...I believe copper is about to say something real bad (ie, global fucking economy sucks) and I think Ben' about to be put to the test of how far QE can (effectively) go.

Panafrican Funktron Robot's picture

Been watching copper too, got as low as 3.04 today.  The 3 mark seems to be a pretty reliable line, the fact that it's even around this territory in spite of fiat deval is remarkable.  The last time copper was this bad was during the 2011 debt ceiling crisis, and back in 2010 with the May flash crash.  

andrewp111's picture

By analogy to stellar evolution, the economy is already off the main sequence, and Ben will soon exhaust the current He burning phase. Will we see a collapse to a white dwarf, or will it go through the carbon, neon, oxygen and silicon burning phases and end in a supernova?

James_Cole's picture

Interest rate hike would be the death of gold. But also the death of western 'economy' so going to be interesting to watch how they square this circle...Again, I always come back to Boston. Seeing how that went down it looks like the empire has their plans worked out pretty well and the population is very much happy to go along. 

fonzannoon's picture

James that's where you are wrong. interest rate hike would be the death of the western economy (which is dead already) but the death of the dollar would not be negative for gold. quite the contrary.

SamAdams's picture

Agreed.  In an economy where real growth is negative, removing dollars will only add to the pain.  And if the agenda is to accelerate the destruction of the US economy and American standard of living, then this is just the ticket.  Meanwhile, citizens who bought gold will begin selling at a loss to those bankers who need physical to return to certain governments.

fonzannoon's picture

the destruction of the US economy would result in a currency crisis. when you have a currency crisis your currency does not appreciate against gold. Stop equating higher rates (growth) with higher rates (crisis). Two very different things.

I'd argue that as people go broke you see black markets everywhere before people sell gold to bankers. But I may just be speaking for myself.

TeamDepends's picture

That's right.  As things unravel why sell gold to pay "debts"?  Better to meet them at the door with your pump shotgun ready to pump 'em full of lead wait a sec is this thing on oh well

SamAdams's picture

if you take money out of circulation, there is not enough to meet the demand.  someone loses a job, house, farm...  only the principal exists, not the interest.  that is the scam, that it is how it is played.  low interest rates, then high interest rates which essentially trades nothing (bankers notes) for real assets (the farm).  this does not destroy a currency, but it does create a recession and transfer wealth from productive to non-productive sources. 

we are currently in the boom as funny as that sounds.  it will seem a lot less funny when they crank up the rates....


James_Cole's picture

low interest rates, then high interest rates which essentially trades nothing (bankers notes) for real assets (the farm).  this does not destroy a currency, but it does create a recession and transfer wealth from productive to non-productive sources. 


It's like fishing with a big net, fish are ready to be reeled in. 

In case people haven't noticed, there are different rules for different entities. Average Joe is not at the beneficial end...

That said, hiking interest rates in this economy - hard to imagine it working out peacefully....but pretty clear .gov is aware and prepared for that. 


FL_Conservative's picture

I think Sam Adams drank a bit too much before he started posting.

akak's picture

James Cole said:

Interest rate hike would be the death of gold.

Well, the hike in the Fed funds rate from 1.0% in 2004 to 5.25% in 2006 certainly did not seem halt the upward progression of the price of gold in the slightest, although other factors could have been in play then.

More fundamentally, one must distinguish between nominal interest rates and REAL interest rates.  If long-term interest rates rise to 4 or 5%, but REAL 'inflation' (dollar debasement) is running even at the same 5-6% that it is at today, much less higher, then that rise in nominal interest rates might still mean little or nothing in the grand scheme of things as far as the price (and value) of gold goes.

orez65's picture

If rates go up there will be panic selling in the bond market leading to hyperinflation.

The Fed is checkmated, the dollar collapses if they keep printing and it collapses if they let interest rates rise.

There is no solution except for default through inflation. 

Bunga Bunga's picture

FED QE exit? Free market for bond rates? Give me a break.

buzzsaw99's picture

word cloud:

exit - 2

unwind - 1

tapering - 1

onewayticket2's picture

Forecast: strong headwinds with an increasing possibility of a complete sh!t storm (aka: brown out) coming.

B2u's picture

Exit?  The will use a revolving door which always points to an exit but never stops to exit.

max2205's picture

We'll all be dead and buried when they let tates go up


Keep moving

blindman's picture

exit shmexit.
when the time comes, ... ahhhh
15 minutes, no more.
100 % confidence and u can take that
to the bank. trust me.
the check is in the mail and, no,
I don't know what that is in your mouth.
read the fine print, it now is ours and
you have a
good day sir.

philosophers bone's picture

Exactly.  Keep issuing longer and longer term bonds (100 hears), then stuff them in sheeple investment accounts.

hedgeless_horseman's picture



Yes, that is the mirrors part, but don't forget the smoke.

Overfed's picture

Every time I see one of those idiots trying to convince me that there's no inflation, I wanna start throwing shit and breaking things. They're lying through their fukkin' teeth, but not one MSM shill will call them out on it.

NotApplicable's picture

Well, that's a relief!

I thought it was gonna be another circle-jerk.

Croesus's picture

That's gotta be bullish!!

Handful of Dust's picture

Bullish for mortgage rates.....and therefore, house prices....

CheapBastard's picture

Shiller predicts another 20% drop...i suspect he is underestimating that drop just to be polite....more like 40% in the forecast.

gatorengineer's picture

wont happen until AFTER the 2016 presidential... Period

madcows's picture

Debt don't matter.

But, interest rates do.

McMolotov's picture

It's not the heat, it's the humidity.

whisperin's picture

Just in time for those FRN's!!! BoooYa!!!

DosZap's picture

There is NO exiting the current system, Epic Fail, either choice.The sheeple may not get it,WE do.

Miffed Microbiologist's picture

The sheeple around me are quite happily picking up the flapping fish on the beach. I pointed out this was not sustainable and the only comment I got was " Look who's talking... Gold Girl. Enjoying your losses?" I smile and nod. " Yes, you are all a lot smarter than I. "


StychoKiller's picture

Hope you have a coupla friendz (Smith&Wesson) to defend yer stash when those good buddies remember you might have some Au/Ag...

Miffed Microbiologist's picture

Thanks esprit & SK,

My reasons for holding ag and au are long term so day to day price fluctuations really don't bother me. My reasoning is still sound to what I'm trying to accomplish. However, it's really tiring being the butt of everyone's joke and, yes, sometimes I get a perverse wish for the whole shit pile to come crashing down just to say I told you so. But, really I dont desire that to happen. I don't think too many of us can really appreciate what that would mean. After reading what happened in Argentina during their economic collapse, I ve been humbled.

Yes, I have quite a few friends to help me guard my pile( LWRC, Springfield Armory, Winchester). How can you have one and not the other? Funny thing, one of the sheeple the other day asked me where I kept my stash ( the audacity!). I told her I could show her the locations up the Cali coastline but she'd have to go with me on my Hobie Cat and suffer numerous capsizings. The look on her face told me any lingering thoughts of my sanity were now truly questionable.


HardAssets's picture

Miffed MicroBio - - - I hear you.  Few choose to think for themselves. Often the ones with the most formal education are the most resistant to new knowledge. They are specialized technocrats/technicians with a very narrow focus. They are often 'A students' who are very competent at learning . . . what is wrong.

No one can predict what will happen next week or next month. But we can educate ourselves on the nature of the world and act accordingly within a society with an economic environment that will not remain as in the past.

Miffed Microbiologist's picture

Funny you should mention this. I was reading a novel describing the conquering of a society. One character was determined to focus on the highly educated intellectuals as the place to start. The other character laughed heartily at the suggestion pointing out these hyper educated people have already give themselves over to the authoritarian powers and are simple to sway. The real problem lay in the pragmatic simple classes who weren't so co opted and therefore must be brutally subdued.

I've got to take up light reading again. Too much reality can be so tiring and depressing.


Debtonation's picture

I wouldn't loan the Federal Government money at any yeild

TeamDepends's picture

Good thing (for them anyway) they've been TAKING it for over a century.