Rising US government debt: What to watch?

Treasury auctions, rating agencies, and the term premium

Torsten Slok, Jyoti Agarwal, and Rajvi Shah

tslok@apollo.com

Apollo Global Management

December 2023

Unless otherwise noted, information as of December 2023.

Confidential and Proprietary - Not for distribution, in whole or in part, without the express written consent of Apollo Global Management, Inc.
It should not be assumed that investments made in the future will be profitable or will equal the performance of the investments shown in this document.
OUTLOOK FOR 2023: INFLATION HAS PEAKED, TIME TO PUT MONEY TO WORK

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Private and Confidential 2

 Table of contents

1. Deficit and debt

2. Who owns US government debt?

3. The maturity structure of US government debt outstanding

4. Debt servicing costs

5. Treasury auction metrics

6. What is the transmission channel to financial markets?

Source: Apollo Chief Economist

3
Government budget deficits and debt levels

Private and Confidential 4

Trillion-dollar deficits as far as the eye can see

$ trn $ trn
US: Budget surplus/deficit

Budget surplus/deficit OMB Federal Budget projection

0.75 0.75

0.25 0.25

-0.25 -0.25

-0.75 -0.75

-1.25 -1.25

-1.75 -1.75

-2.25 -2.25

-2.75 -2.75

-3.25 -3.25

-3.75 -3.75
1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031
Source: OMB, Haver Analytics, Apollo Chief Economist 5
OMB forecasts 5% budget deficit every year for the next 10 years

% %
US: Budget surplus/deficit as a % of GDP

Budget surplus/deficit OMB Federal Budget projection

10 10

5 5

0 0

-5 -5

-10 -10

-15 -15

-20 -20
1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031
Source: OMB, Haver Analytics, Apollo Chief Economist 6
Under current policies, debt outstanding will grow to 200% of GDP

% Federal Debt held by Public (% GDP) %

200 CBO estimates 200

180 180

160 160

140 140

120 120

100 100

80 80

60 60

40 40

20 20

0 0
1790 1820 1851 1882 1910 1941 1971 2002 2032

Source: CBO, Haver Analytics, Apollo Chief Economist 7

 $ bn

1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
Jan-2017
Mar-2017
Apr-2017
Jun-2017
Aug-2017
Oct-2017
Dec-2017
Jan-2018

Source: U S Treasury, Bloomberg,, Apollo Chief Economist

Mar-2018
May-2018
Jul-2018
Sep-2018
Nov-2018
Jan-2019
Feb-2019
Apr-2019
Jun-2019
Aug-2019
Oct-2019
Dec-2019
Jan-2020
Mar-2020
May-2020
Jul-2020
Sep-2020
Nov-2020
Dec-2020
US Treasury securities

Feb-2021
Securities held by the Federal Reserve

Apr-2021
Jun-2021
Aug-2021
Oct-2021
Dec-2021
Jan-2022
More Treasury supply from QT: Fed is selling $60bn every month

Mar-2022
May-2022
Jul-2022
Sep-2022
Nov-2022
Dec-2022
Feb-2023
Apr-2023
Jun-2023
Aug-2023
Oct-2023
Nov-2023
$ bn

1500
2000
2500
3000
3500
4000
4500
5000
5500
6000

8
G4 Central bank balance sheets

$bn, 6m MA Central bank balance sheet expansion $bn, 6m MA

1300 1300

1100 BoE BoJ Fed ECB Total 1100

900 900

700 700

500 500

300 300

100 100

-100 -100

-300 -300
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Jan-23
Jul-23
Source: Bloomberg, Apollo Chief Economist 9
CBO interest rate assumption

%
8.0 10-Year Treasury Note Rate Average Rate on Federal Debt

7.0
CBO interest rate assumption
6.0

5.0

4.0

3.0

2.0

1.0

0.0
1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053
Source: The 2023 Long-Term Budget Outlook, CBO, Apollo Chief Economist 10
 0
1
2
3
4
5
6
%
Jan-20
Apr-20
Jul-20
Oct-20
Jan-21

Source: Bloomberg, Apollo Chief Economist

Apr-21
Jul-21
Oct-21
Jan-22
Apr-22
Jul-22
Oct-22
Jan-23
Fed Funds rate

Apr-23
Market pricing rates higher for longer

Jul-23
Oct-23
Jan-24
Apr-24
Jul-24
Oct-24
Jan-25
Apr-25
Jul-25
Oct-25
Jan-26
Apr-26
Fed Funds futures

Jul-26
Oct-26
Jan-27
Apr-27
Jul-27
Oct-27
Jan-28
Apr-28
Jul-28
0
1
2
3
4
5
6

11
Low liquidity: Public debt outstanding vs primary dealer trading volume

trn trn
40 1
US Total Debt Outstanding Primary Dealer Daily Avg Trading Volume US Govt Securities
0.9
35
0.8
30
0.7
25
0.6

20 0.5

0.4
15
0.3
10
0.2
5
0.1

0 0
Mar-00

Jul-01
Mar-02

Jul-03
Mar-04

Jul-05
Mar-06

Jul-07
Mar-08

Jul-09
Mar-10

Jul-11
Mar-12

Jul-13
Mar-14

Jul-15
Mar-16

Jul-17
Mar-18

Jul-19
Mar-20

Jul-21
Mar-22

Jul-23
Nov-00

Nov-02

Nov-04

Nov-06

Nov-08

Nov-10

Nov-12

Nov-14

Nov-16

Nov-18

Nov-20

Nov-22
Source: Bloomberg, Treasury, Apollo Chief Economist 12
Factors contributing to population growth: Migration is key driver

% Population growth
1.0

Net Immigration Births Minus Deaths Population Growth

0.8

0.6

0.4

0.2

0.0

-0.2
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
Source: The 2023 Long-Term Budget Outlook, CBO, Apollo Chief Economist 13
Who owns US government debt?

Private and Confidential 14

Who owns the $25trn in Treasuries outstanding?

$ bn Holdings of Treasuries
30000

Households Banks Life + Non Life insurance Mutual Funds + Private Pensions Foreigners Fed Others
25000

20000

15000

10000

5000

0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: FFUNDS, Haver, Apollo Chief Economist 15 15
Trend decline in foreign ownership of US government bonds since 2015

% Foreign holdings of US Treasury securities as a share of outstanding public debt %

40% 40%

35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%
Sep-75

May-81

Sep-92

May-98

Sep-09

May-15
Aug-85

Aug-02

Aug-19
Jan-70

Mar-84

Jan-87

Mar-01

Jan-04

Mar-18

Jan-21
Jun-71

Apr-74

Jul-78

Jun-88

Apr-91

Jul-95

Jun-05

Apr-08

Jul-12

Jun-22
Nov-72

Feb-77

Oct-82

Nov-89

Feb-94

Oct-99

Nov-06

Feb-11

Oct-16
Dec-79

Dec-96

Dec-13
Source: Treasury, Haver Analytics, Apollo Chief Economist 16
US households and real money buying Treasuries, Fed selling Treasuries

Fed starts
Holders of US Treasuries raising rates
$ trn Federal Reserve Households Real money Foreign $ trn
8 8

7 7

6 6

5 5

4 4

3 3

2 2

1 1

0 0

-1 -1

Source: FFUNDS, Haver, Apollo Chief Economist 17 17

Fed selling Treasuries (doing QT). Domestic investors buying Treasuries

Holdings of Treasuries (% Treasury Debt Outstanding)

Federal Reserve Foreigners US domestic real money, banks, households
80% 80%

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0%
1985 1990 1995 2000 2005 2010 2015 2020

Source: FFUNDS, Haver, Apollo Chief Economist 18 18

 As the Fed has been raising rates, US households have been big buyers of US Treasuries

$ bn $ bn
Net Purchases of Treasury Securities
1000 1000
Households Mutual Funds Rest of the World Fed starts
800 800
raising rates
600 600

400 400

200 200

0 0

-200 -200

-400 -400

-600 -600

-800 -800

-1000 -1000

Source: FFUNDS, Haver, Apollo Chief Economist 19 19

Foreign official holdings of US bonds is falling

$bn, 12 month sum Foreign official institutions holdings of US Treasuries $bn, 12 month sum
50000 50000
Bills Bonds
45000 45000

40000 40000

35000 35000

30000 30000

25000 25000

20000 20000

15000 15000

10000 10000

5000 5000

0 0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Jan-23
Jul-23
Source: Treasury, Haver Analytics, Apollo Chief Economist 20
Foreign purchases of Treasuries comes from the private sector

$ bn, 12m sum $ bn, 12m sum

Net Foreign Purchases: Treasury Bonds & Notes
1000 1000
Private Official
800 800

600 600

400 400

200 200

0 0

-200 -200

-400 -400

-600 -600
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Jan-23
Jul-23
Source: Treasury, Haver Analytics, Apollo Chief Economist 21
Japanese and Chinese holdings of Treasury securities

$ bn $ bn
Holdings of US Treasury Securities
Japan China
1400 1400

1200 1200

1000 1000

800 800

600 600

400 400

200 200

0 0

Source: Treasury, Haver Analytics, Apollo Chief Economist 22

Japan: Insurance and pension own most of the foreign debt securities

$bn Japanese holdings of foreign debt securities

3500
Other financial corporations Depositary institutions Non-financial corporations General Government
3000

2500

2000

1500

1000

500

0
Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Source: Ministry of Finance Japan, Bloomberg, Apollo Chief Economist 23
Hedging costs are high for Japanese investors buying US Treasuries

% EUR-hedged 10-yr US Treasury yield minus 10-year Bund yield %

JPY-hedged 10-yr US Treasury yield minus 10-year JGB yield
3 3
GBP-hedged 10-yr US Treasury yield minus 10-year Gilt yield

2 2

1 1

0 0

-1 -1

-2 -2

-3 -3
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: Bloomberg, Apollo Chief Economist. Note: Hedged Treasury yield is calculated as ((((-3 month forward/10000)/exchange rate)+1)^4-1)*100 + 10 year US Treasury yield. 24
Who owns different countries’ government debt?

Foreign official Foreign banks Foreign nonbanks Domestic central bank Domestic banks Domestic nonbanks

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Source: The IMF, Apollo Chief Economist. Note: Data as of year-end 2022. 25
EM: Who owns different countries’ government debt?

Foreign banks Foreign official Foreign nonbanks Domestic central bank Domestic banks Domestic nonbanks

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Source: The IMF, Apollo Chief Economist. Note: Data as of year-end 2022. 26
The maturity structure of US government debt

Private and Confidential 27

Weighted average maturity of debt outstanding: 6 years

Years Average maturity of all US Treasuries outstanding Years

6.5 6.5

6.0 6

5.5 5.5

5.0 5

4.5 4.5

4.0 4

Source: Treasury, Haver Analytics, Apollo Chief Economist 28

 %

5%
10%
15%
20%
25%
30%
35%
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08

Source: Treasury, Haver Analytics, Apollo Chief Economist

Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Share of T-bills has increased significantly in 2023

Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Treasury bills outstanding as a share of total marketable debt

Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Jan-23
Jul-23
%

5%
10%
15%
20%
25%
30%
35%

29
$8.5trn - or 33% - of government debt will mature over the next year

$ bn Market Interest-Bearing Public Debt Maturing Within One Year or Less %

Percentage of Marketable Debt Maturing in the Next 12 Months (RHS)
Market Interest-Bearing Public Debt Maturing Within One Year or Less (% GDP, RHS)
9000 50

8000 45
7000
40
6000
35
5000
30
4000
25
3000
20
2000

1000 15

0 10

Source: Treasury, BEA, Haver Analytics, Apollo Chief Economist 30

Debt servicing costs rising

Private and Confidential 31

US government interest payments per day have doubled from $1bn per day
before the pandemic to almost $2bn per day in 2023
$bn Net interest expense per day on public debt
2.5

2.3

2.1

1.9

1.7

1.5

1.3

1.1

0.9

0.7

0.5
2019 2020 2021 2022 2023

Source: CBO, Haver Analytics, Apollo Chief Economist. Note: Interest rate assumption by CBO: 2.1% in 2022 and 2.7% in 2023. Annual CBO data divided by 365. 32
Debt servicing costs rising rapidly

$bn Net interest payments on US Federal debt % GDP

Interest payments Interest payments (%GDP, RHS)
3.5%
OMB
1400
forecasts
3.0%
1200
2.5%
1000
2.0%
800

1.5%
600

400 1.0%

200 0.5%

0 0.0%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
Source: Treasury, OMB, Haver Analytics, Apollo Chief Economist. Note: OMB estimates 10-year yield at around 3.5% in the next 10 years 33
Interest payments on government debt are rising

% %
Total interest expense as a % of public debt outstanding 10 year rates (6m forward) (rs)
5.0 5.5

5.0
4.5
4.5
4.0 4.0

3.5
3.5
3.0
3.0
2.5

2.5 2.0

1.5
2.0
1.0

1.5 0.5
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24

Source: Haver Analytics, Apollo Chief Economist 34

CBO: Debt servicing costs will grow as a share of total outlays over the next 30 years

Total outlays, 2023 Total outlays, 2053

10
23

77
90

Net Interest Noninterest Net Interest Noninterest

Source: CBO, Apollo Chief Economist 35

CBO: Non-interest outlays distribution, 2023 vs 2053

Total non interest outlays, 2023 Total non interest outlays, 2053

27 24
30
38

24 19
28

Discretionary Other Mandatory Discretionary Other Mandatory

Social Security Major Health Care Programs Social Security Major Health Care Programs

Source: CBO, Apollo Chief Economist 36

Treasury auction metrics

Private and Confidential 37

Treasury auction sizes will in 2024 increase on average 23% across the yield curve

$bn Treasury issuance across tenors

2013 2018 2023 2024
900

800

29% 28%
700
37%
600
18%
500 10%

400

300 23%
16%
200

100

0
2s 3s 5s 7s 10s 20s 30s

Source: SIFMA, TBAC, Haver Analytics, Apollo Chief Economist. Note: Estimates from September 2023 to Dec 2024 from the TBAC neutral issuance scenario. 38
Auction sizes growing

$ bn Nominal Security Auction Sizes $ bn

70 70
2Y 3Y 5Y 7Y 10Y 20Y 30Y
60 60

50 50

40 40

30 30

20 20

10 10

0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: Bureau of Public Debt, Haver Analytics, Apollo Chief Economist 39

Downside risks to bid-to-cover ratios in 2024

3mma Bid-to-Cover Ratio 3mma

4.0 4.0
2 yr 3 yr 5 yr 7 yr
3.8 3.8

3.6 3.6

3.4 3.4

3.2 3.2

3.0 3.0

2.8 2.8

2.6 2.6

2.4 2.4

2.2 2.2

2.0 2.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Source: Bureau of Public Debt, Haver Analytics, Apollo Chief Economist 40

Downside risks to bid-to-cover ratios in 2024

3mma Bid-to-Cover Ratio 3mma

3.4 3.4

10 yr 20 yr 30 yr
3.2 3.2

3.0 3.0

2.8 2.8

2.6 2.6

2.4 2.4

2.2 2.2

2.0 2.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Source: Bureau of Public Debt, Haver Analytics, Apollo Chief Economist 41

Conclusion

Private and Confidential 42

 Growing debt levels: What to watch?

1. Treasury auctions
2. Ratings agencies
3. The term premium

Source: Apollo Chief Economist

43
Term premium is key

% 10 year Treasury term premium %

5 5

4 4

3 3

2 2

1 1

0 0

-1 -1

-2 -2
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Source: FRBNY, Bloomberg, Apollo Chief Economist Private and Confidential 44

US government debt vs 10-year rates

$ trn %
US daily public debt held by the public 10 year rates (RHS)
30 6

25 5

20 4

15 3

10 2

5 1

0 0

Source: Bloomberg, Apollo Chief Economist 45

 Torsten Slok joined Apollo in August 2020 as
Chief Economist and he leads Apollo's
macroeconomic and market analysis across
the platform.

Prior to joining, Mr. Slok worked for 15 years

as Chief Economist at Deutsche Bank where
Torsten Slok, Ph.D. his team was top ranked in the annual
Institutional Investor survey for a decade. Prior
to joining Deutsche Bank Mr. Slok worked at
the IMF in Washington, DC and at the OECD in
Chief Economist Paris.
Apollo Global Management
Mr. Slok has a Ph.D in Economics and has
tslok@apollo.com
studied at the University of Copenhagen and
Princeton University.

Private and Confidential 46