US: Treasury Budget

Tue Jan 13 13:00:00 CST 2015

Consensus Consensus Range Actual Previous
Treasury Budget - Level $3.0B $-57.0B to $24.0B $1.9B $-56.8B

Gains in Medicare and net interest outlays widened the government's deficit during the first 3 months of the fiscal year, at 2.4 percent above the same period a year ago. Medicare outlays, driven by Obamacare, are up 9.8 percent year to date with net interest up 6.1 percent and social security, which is the largest outlay component, up 4.3 percent. The second largest outlay component, defense, remains lower than a year ago but just barely at minus 0.2 percent.

The increases in outlays offset a very healthy receipt side of the ledger which, driven by gains in taxes that reflect the strength of the economy, is up 11.0 percent year to date. Data for December, a month that has shown a surplus in 25 of the last 51 years, shows a $1.9 billion surplus.

Market Consensus Before Announcement
The U.S. Treasury monthly budget report for November showed the Treasury's deficit continues to come down, to $178.5 billion now 2 months into the government's fiscal year for a year-to-date decrease of 21 percent. Excluding special factors, including calendar timing that pushed November outlays into December, the Treasury's deficit is down an estimated 8 percent year-to-date. For comparison, the government's deficit fell 29 percent in fiscal year 2014. Looking ahead, the month of December typically shows a moderate deficit for the month. Over the past 10 years, the average deficit for the month of December has been $15.7 billion and $40.7 billion over the past 5 years. The December 2013 figure came in with a surplus of $53.2 billion.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.

The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.