US: Treasury Budget

Tue Apr 12 13:00:00 CDT 2016

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-102.0B $-104.0B to $-88.0B $-108.0B $-192.6B

Increased costs for Medicare and especially net interest payments drove the Treasury's budget deficit in March to $108.0 billion, a slightly larger-than-expected total that, six months into fiscal 2016, lifts the increase in the government's deficit to 4.9 percent. Medicare costs are up 4.4 percent year-to-date with net interest expense, reflecting relatively high rates for Treasuries vs foreign securities, up 18.2 percent. Individual tax receipts are up 5.2 percent year-to-date ahead of next month's receipts for the heaviest of all tax months, April. By September which is year end, the gap is expected to grow to 20 percent over fiscal 2015 to about $550 billion.

Market Consensus Before Announcement
The Treasury budget is expected to show a $102.0 billion deficit in March which is the sixth month of the government's fiscal year. Five months into the fiscal year in the February report, the Treasury's deficit was nearly 9 percent narrower than a year ago but is expected to widen back out, by about 20 percent to $550 billion by fiscal year-end.

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.