Concerns of U.S. Budget Deficits Spread Across Wall Street

The last year that the United States had a federal budget surplus was in fiscal year 2001 according to Federal Reserve Bank of St. Louis data reported by the Wall Street Journal, and since then the ongoing deficit has fluctuated, reaching $1.8 trillion in fiscal year 2024.Thus far in 2025, interest rates continue to be high, and the bond market has been “jumpy, producing worrying spikes in borrowing costs.” As a share of the economy, the nation’s deficit is “already around levels reached in the era of the 2008 financial crisis and the pandemic,” however, the recent spending and tax bill passed in Washington adds $3.4 trillion to federal deficits through 2034 compared with a scenario in which Congress did nothing” according to the Congressional Budget Office (CBO). Last fiscal year, the annual gap, or deficit between government revenue and spending was $1.8 trillion, or around 6% of gross domestic product (GDP); and credit rating firm Moody’s estimated it will reach nearly 9% of GDP by 2035, “pushing publicly held federal debt — or the sum of all the annual shortfalls — from a little under 100% of GDP now to more than 130%,” surpassing the previous 1946 record high of 106%. Despite President Trump and his GOP supporters reportedly saying, “tax cuts will accelerate growth and, along with new tariffs and heavy cuts to social programs such as Medicaid, will actually put the nation on sounder financial footing,” it is anticipated that the “long-term verdict might be rendered in U.S. bond markets.” The government issues Treasurys to borrow money, but if an oversupply is created of those bonds, it would drive up yields, which rise when prices fall. However, since they are backed by “the world’s richest country and are effectively guaranteed to be repaid at maturity,” Treasurys have long been viewed as “the ultimate safe investment, which has helped keep “America’s borrowing rates in check, even as the volume of debt grew.” Although the appetite for U.S. debt may very large, if foreign buyers, including foreign central banks, which own nearly a third of publicly held debt, start worrying about America’s large debt load, they could start shifting reinvestment away from the U.S. as their portfolios roll off. But a viable plan by the Trump administration to mitigate the impact of deficits on the market is to “leave sizes on longer-term debt auctions unchanged at least through the end of the year,” while leaning more on “ultrashort-term debt to meet coming borrowing needs, thereby minimizing pressure on longer-term bonds, which matter more for consumer and business borrowing costs.”

Source:    https://www.wsj.com/finance/investing/wall-street-crisis-deficits-default-mode-bf1f5940