Federal Debt Refinanced at Higher Rates: What it Means for Households

A recent report by Ambrose Evans-Pritchard in the Telegraph suggests that the US may be heading towards a financial crisis. However, Rick Kahler, a financial therapist and expert, is skeptical of this prediction but notes one fact that applies to households as much as it does to the Treasury.

The federal government has been borrowing short-term, with about 85% of its borrowing in recent years being Treasury bills that mature in a year or less. This makes up 22% of outstanding marketable federal debt, which is higher than the recommended range of 15-20%. Roughly 20% of all federal debt comes due within four months.

Kahler notes that both parties have contributed to this strategy, with the Treasury beginning to lean on short-term bills in 2023 after Congress suspended the debt ceiling. The reward is short-term savings, but the risk is that if interest rates rise, a significant chunk of the federal debt will be refinanced at the new higher rate within twelve months.

A rate increase is possible given that inflation has been above the Federal Reserve's 2% target for over five years. If this happens, households with variable-interest debts may see their payments change without them doing anything. Kahler advises taking a debt inventory to assess the risk and suggests recalculating variable debt payments at three percentage points above today's rate.