US: Treasury Budget

Thu Nov 12 13:00:00 CST 2015

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Treasury Budget - Level $-136.5B $91.1B

Gains in Medicare expenses, up 9.8 percent from a year ago, fed a $136.5 billion deficit in October which is a sizable 12.2 percent higher than October last year. October is the first month of the government's fiscal year. The gain in Medicare, as well as a 4.3 percent gain in Social Security, were offset in part by a 5.3 percent decline in net interest and a 4.6 percent decline in defense. All together, total spending was up 3.9 percent on the year. October isn't a tax month which keeps down receipts. October was an expensive month but the government did end the 2015 fiscal year on an upnote as the deficit fell 9.2 percent and the percentage relative to GDP fell 3 tenths to 2.5 percent, both recovery bests.

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.