What you need to know about the federal debt, and GAO's analysis of debt management challenges.
When the federal government spends more money than it receives in revenue, it runs a budget deficit. To cover budget deficits and finance government activities—including interest payments—the Department of the Treasury must borrow money from the public by issuing Treasury securities to investors.
Federal debt is the total amount of money that the federal government owes, either to its investors (debt held by the public) or to itself (intragovernmental debt). Intragovernmental debt is owed by Treasury to other parts of the federal government. For example, some federal trust funds invest in Treasury securities, thereby lending money to Treasury. While intragovernmental debt essentially reflects money that the federal government owes to itself, Treasury must eventually repay the federal accounts that hold intragovernmental debt. Treasury typically does this by borrowing from the public, which in turn adds to federal debt held by the public.
By the end of FY 2021, total federal debt was $28.4 trillion—78% of which was debt held by the public and 22% of which was intragovernmental debt.
Debt Held by the Public and Intragovernmental Debt, as of Sept. 30, 2021
Treasury issues the following securities on a regular and predictable auction schedule:
- Bills are short-term securities maturing in 1 year of less.
- Notes are interest-bearing securities that have a fixed maturity of not less than 1 year and not more than 10 years from their date of issue.
- Bonds are interest-bearing securities with maturities over 10 years. Treasury currently issues 20- and 30-year bonds.
- Treasury Inflation Protected Securities (TIPS) are securities whose value are adjusted by changes in the Consumer Price Index. TIPS are issued with maturities of 5, 10, and 30 years.
- Floating Rate Notes are 2-year securities that make fluctuating interest payments which either rise or fall based on rate for the 13-week Treasury bill.
These securities are attractive to a diverse group of investors because they are safe, liquid, and deep. This strong investor demand, in turn, helps Treasury meet its primary debt management objective: to borrow at the lowest cost over time.
Key Characteristics of the Treasury Market
Federal debt can both promote and slow economic growth. For example, borrowing (in lieu of higher taxes or lower government spending) may be viewed as appropriate during economic recessions, wars, public health crises, and other temporary challenges or national needs. Debt may also be a cost-effective means of financing federal investments (such as transportation or water infrastructure) that promote future economic growth, public safety, and health.
However, high levels of federal debt can impede economic growth. Over time, lower productivity and GDP growth may ultimately reduce or slow the growth of the living standards of future generations.
Treasury must promote strong demand for its securities from a diverse group of investors while making debt issuance decisions that appropriately balance risks and interest costs. To do so, Treasury regularly makes important debt issuance decisions—such as what type of Treasury security to issue and in what quantity—in the face of changing financing and economic conditions.
- Uncertain future borrowing needs. Policy changes and economic conditions are difficult to project and can quickly and substantially affect federal cash flow. Policy responses to external events like recessions, war, and emergencies (e.g., natural disasters such as hurricanes) can dramatically affect borrowing needs. For example, starting in April 2020, Treasury raised trillions of dollars quickly to meet the unexpected and unprecedented increase in financing needs arising from the COVID-19 pandemic—including issuing $2.5 trillion of Treasury securities in April alone.
- Uncertainty about future interest rates. Treasury’s debt management goal is to borrow at the lowest cost over time, while also managing its debt portfolio to mitigate rollover risk (the risk that it may have to refinance its debt at higher interest rates). To do this, Treasury needs to consider the mix of longer-term and shorter-term securities that it offers. Longer-term securities typically have higher interest rates than short-term bills, but offer more certainty for budget planning and help mitigate refinancing risk because they do not mature as frequently as bills. Their interest rates are also set for the duration of the security.
- Uncertainty about the debt limit. The debt limit is a legal limit on the total amount of federal debt that can be outstanding at one time. The debt limit is currently an after-the-fact measure that restricts Treasury’s authority to borrow to finance the spending and revenue decisions that Congress and the President have already enacted. Delays in suspending or raising the debt limit create debt and cash management challenges for the Treasury. Delays in raising the debt limit have occurred in 10 of the last 11 fiscal years. As a result, Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the limit. Once it has exhausted all extraordinary actions, Treasury may not issue debt without further action from Congress and the President. If Treasury does not have enough cash on hand to meet its financial commitments, Treasury could be forced to delay payments until sufficient funds become available. Treasury might eventually be forced to default on legal debt obligations, which would have devastating effects on U.S. and global economies. However, there are alternative approaches to the debt limit that would mitigate these risks.
- Changing financial markets. Recent disruptions—situations where markets cease to function in a regular manner, often characterized by rapid and large market declines—have highlighted how structural shifts in financial markets can affect the Treasury market. For example, the shock of COVID-19 to financial markets led to a severe disruption in the Treasury market in March 2020, prompting a swift response by the Federal Reserve. These challenges pose risks to the liquidity and efficiency of the Treasury market at a time when debt issuance—and the amount of Treasury securities outstanding—is expected to grow. Disruptions in market functioning could reduce investor demand for Treasury securities and negatively affect Treasury’s ability to borrow money at the lowest cost over time.