"Debt Research Note"
by Dan Denning
"Bad news, everyone. The national debt went over $37 trillion for the first time ever, according to the ‘Debt to the Penny’ tracker provided by the US Treasury Department. The second line on the chart above is ‘debt held by the public.’ That’s increased 85% in the last six years, from $16.25 trillion in 2019 to $29.6 trillion today (in that same time, China’s holdings of US government bonds and notes has decreased by 31.4%, from over $1.1 trillion in 2019 to $756.5 billion today, a reduction of almost $350 billion).
Yesterday’s Monthly Statement of the Treasury showed a 20% year-over-year increase in the size of the government’s annual deficit. July’s $291 billion deficit was offset by $28 billion in ‘customs duties’ (tariff revenue). But with two months left in the government’s fiscal year, the $1.63 trillion year-to-date deficit should eclipse 2024’s figure of $1.83 trillion.
The government’s second biggest expense in July was the $831 billion in spent on ‘Net Interest,’ or interest payments on the national debt (this was larger than Medicare, Medicaid, and Defense spending, and smaller only than Social Security). This money is paid to bond holders (banks, insurance companies, pension funds, investors, foreign bond holders and central banks). But while it’s income for some, it otherwise creates nothing productive.
As bond yields move up, bond prices move down. In order to cap the interest expense on government debt…we believe there’s a ‘ceiling’ to 10-year bond yields around 5%…and thus a floor to bond prices, creating the opportunity to generate income selling puts."
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