Big Banks and Brokers to Treasury: Too Much Short Term Debt Means Rollover Risk is Real

From Bloomberg yesterday (bolding and brackets ours):

The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency“appears to be slipping” in quarterly feedback presented to the government.

The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pacific Investment Management Co. [not to mention JP Morgan Chase], said the outperformance of haven currencies and those from emerging nations has aided in the debasement of the dollar’s reserve status, according to comments included in discussion charts presented ahead of the quarterly refunding. The Treasury published the documents today.

“The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” page 35 of the presentation made by one committee member said. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”

Indeed, and here is the full slide from page 35 (click for larger image):

The presentation continues with a look at the mix of maturities of OECD nations:

The exposure that the US has on the short end of the curve (less than five years) is a key concern of these well-connected financial insiders. Highlighted is that any comparison with the mid-1940's is not apt because the US had a much greater percentage of its debt in longer maturities at that time.

While GDP is bogus, it's still a closely watched statistic, and the TBAC is noting the alarming trend in debt maturing as a percentage of GDP.

Another chart that projects interest expense differentials. Note the worst case scenario covered is a relatively mild (in our view) 500 bp (5.00%) "shock" increase in rates in five years.

And the somber conclusion that, for once, includes a statement of "it's different this time" with which we agree.

Conclusion

• The benefits of extension do not come for free. Historical analysis suggests that shorter term funding has at many times been both cheaper and the volatility volatility costs costs have have not not been been high high

• Recent cycles of rising rates have not lasted long enough for maturity extension to pay off

• It is possible, however, that “this time is different” because
  
  o Nominal rates are much closer to the zero bound than previous periods
  
  o Deficits are are very very high high historically historically and and rising rising interest interest expense expense less less acceptable acceptable
  
  o Concentrated foreign ownership creates less reliable demand
  
  o The benefits of funding attributable to being the reserve currency may be fading

• While this this presentation presentation has has focused focused exclusively exclusively on average average maturity maturity, a topic topic for future study is the impact of the distribution of maturities on total interest expense

The full presentation in PDF format may be found here.