This is a quick update of the analysis of WIFIA’s FYE 2021 loan portfolio with respect to interest rate re-estimate exposure. At FYE 2021, the portfolio included 59 loans and loan commitments totaling about $11.5 billion. Since then, the program has added 29 loans totaling $3.8 billion, but these are not included in this update, nor are any further commitment drawdowns. They will be included in a FYE 2022 update later this year. For various reasons, it’s not likely that the additional loans or drawdowns will materially change the scale of the FYE 2021 portfolio’s interest rate exposure.

The biggest update of course is the rise in interest rates since autumn last year. The most relevant rate, 20YR UST, averaged 3.48% for June 2022, up 1.49% from the September 2021 average. This rise was much, much faster than the CBO’s projections:

If all of the FYE 2021 loan commitments were drawn on June 30, 2022, realized funding losses would be about $2.4 billion, or about 20% of the portfolio:

That translates into future mandatory appropriations that dwarf the program’s discretionary appropriations:

Of course, these funding losses are unrealized, and WIFIA is not a private-sector bank with a limited capital base. A lot could change:

• Interest rates could fall back to low levels before the loan commitments are drawn. This might happen in a deflationary recession.

• A stagflationary recession or even prolonged high inflation will probably mean higher rates, but in that case the real value of future mandatory appropriations will be reduced.

• Disruptions in private debt markets might result in later loan commitments being drawn and amortized at relatively high rates, resulting in funding gains that offset the FYE 2021 portfolio’s losses. This would require WIFIA to suspend its reset policy, but that’s presumably possible, as it’s not legislatively required.

No doubt there are other possible outcomes — we live in uncertain times. Still, the scale of potential funding losses relative to what Congress thought were the necessary discretionary appropriations for the program is a red flag. As described in the FYE 2021 analysis, these giant off-budget losses point to a FCRA budgeting loophole that should be recognized and addressed.

To be clear, there’s nothing wrong with federal infrastructure loan programs offering interest rate management products — they’re likely to be more valuable than ever. And Treasury certainly has the capability and economies of scale to provide them at the lowest possible cost to the US taxpayer. But to make such products sustainable, their cost has to be correctly assessed and put on the discretionary budget. Otherwise, unpleasant surprises are virtually certain.