Friday, January 13, 2006


Remember the 1981 Jane Fonda film, Rollover, about a diabolical plot by Arabs to withdraw their oil export money from western banks and crash the world's monetary system? In reading a few reviews of the film on the internet, I've discovered that I must be one of those finance geeks, because I, unlike the reviewers who neither enjoyed it nor found it plausible, remember enjoying it, not in the theater run but later, after working in the field a few years. The premise of the film was, to me, quite plausible, which perhaps explains my uneasiness after reading of the US Treasury's funding needs this quarter (US$171B).

Beginning in the Clinton administration, by virtue of their preference for paying off high interest, longer dated bonds during the "surplus" years, the average maturity of US debt has been declining. This process was accelerated when the Bush team stopped issuing 30 year bonds in 2001.

To give some sense of the change, it has been 20 years since the average maturity of US marketable securities has been less than 55 months (under 5 years) as it is currently. Moreover, unlike 20 years ago, when the average maturity of issuance
(1 year moving average) was much higher (roughly 6 years and higher), over the past 3 years the average maturity of issuance has been less than 3.2 years.

As one would expect, when the average maturity of the debt you issue has been 3 years or less for the past 3 years, you likely have a growing stock of short term debt that needs to be rolled over. As the US has been running substantial trade deficits through this period, not only is there a substantial amount of short term debt that needs to be rolled over, a good portion of that debt is foreign owned, or as they call it in emerging market (or banana republic to old Aussie Treasurer Keating) lingo, the dreaded short term external debt.

As of 9/30/05, the US had US$546B of under 1 year external debt maturing. You can check out the amounts and maturities yourself they should be updated soon.

For the past few years, the US has dodged quite a few financial bullets in that they (actually it should be we) found very cheap finance borrowing in the short end while the Fed was easy. Now as the Fed has tightened the front end, interest charges are beginning to bite. That is where things get interesting. The long end of the bond market has remained fairly stable in part because the Treasury hasn't been borrowing there. Will the Treasury being to extend the average maturity of issue? Will foreigners prefer to stay in the front end and earn the higher rates should the curve invert?

More troubling, when you have half a trillion in short term external debt and another few hundred billion in projected primary borrowing, who is in charge of the budget process, Congress, the President or those foreigners who may or may not roll our debt over?

Who knows, maybe the film critics will have greater insight into this film in coming years.

ps Gold, unlike Federal Reserve Notes won't lose lots of value in the event the US has troubles rolling its debt over.