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Issuing 3 month bills to reduce interest burden on US debt?

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Hi Cullen, in one of your old articles you mention this which I don’t quite follow:

Yes, the US Government can Afford its Debt and Manage Rising Rates

“The interest burden in the USA is actually declining as a % of GDP.  We pay about $250B in debt service every year. The Federal govt could actually reduce this substantially by reducing the maturity on their debt. They have complete control over their interest costs if they so desire by controlling the duration of their bond issuance. Theoretically, they could just issue 3 month bills at low interest rates in order to keep their own interest costs low….”

How would issuing 3 month bills at low interest rates lower interest payment costs on debt? Does this not imply there must be a demand for 3 month bills in the first place to pull this off?

Also would this not devalue the currency if the market is flooded with 3 month bills to pay off the debt?

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Posted by Incognito 7
Posted on 05/10/2017 5:08 AM
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Private answer

It’s about reducing the average effective maturity. You see, the avg effective maturity is about 6 years right now. So, we sell the equivalent of bonds with a 1-1.5% yield right now. If we reduced the maturity of the bonds to bills then we’d set the rate at the short term rate. We’d drop the maturity to whatever the short-term rate is.

I don’t see how it would devalue the currency. Why does swapping 1 year bills for 5 year bonds change anything other than the cost of that funding?

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Cullen Roche Posted by Cullen Roche
Answered on 05/10/2017 11:58 PM
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    Why would reducing the maturity reduce the interest payments? Is this a supply and demand thing – flooding the market with short maturity bills to drive the interest rate down?

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    Posted by Incognito 7
    Answered on 05/11/2017 3:07 AM
      Private answer

      Reducing the effective maturity reduces the average cost of your bonds. If I fund all my debt with 10 year bonds at 5% and can refinance every 5 years at 4% then why would I pay 5%??

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      Cullen Roche Posted by Cullen Roche
      Answered on 05/11/2017 3:12 AM
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