If this rate of increase continues, interest on the debt will overtake spending on defense next year. ![]() Defense spending grew 7 percent, from $727 billion to $774 billion. Interest payments on the debt increased 33 percent, from $534 billion in FY 2022 to $711 billion in FY 2023. Social Security payments increased 11 percent, from $1.2 trillion in FY 2022 to $1.3 trillion in FY 2023, while Medicare payments increased 18 percent, from $751 billion to $846 billion, and Medicaid payments increased 4 percent, from $592 billion to $616 billion. ![]() Only 20 saw larger deficits, at $3.1 trillion and $2.8 trillion, respectively. Congress on federal economic and budgetary matters.įor fiscal year (FY) 2023 indicate the federal deficit grew to about $2 trillion, nearly $1.1 trillion larger than the prior year after excluding the effects of the administration’s student debt cancellation plan that the Supreme Court struck down in June. Preliminary figures from the Congressional Budget Office (CBO) The Congressional Budget Office (CBO) provides nonpartisan analysis to the U.S. In our view, continued very large fiscal deficits could fuel some uncertainty and lead to even more yield curve steepening,” they say.Outside of the pandemic years, this year’s federal deficit is the highest in U.S. “Questions will inevitably include if and how they will be reduced and be financed. However, with the jump in long-term yields since the beginning of August, that gap has rapidly narrowed to roughly 0.36 percentage points.Īt Fidelity Investments, fixed-income portfolio managers Jeff Moore and Michael Plage point to how concerns about deficits affect the yield curve. This July, the yield on the 2-year note stood more than 1 percentage point above the 10-year’s. That’s known as an inverted yield curve, and it’s often seen as a harbinger of a recession.Īs the Fed aggressively raised short-term rates, the yield curve inversion got to its most extreme levels since the early 1980s. However, at certain times, like now, the shape of the yield curve can flip, with short-term yields rising above long-term yields. Most of the time, yields on longer maturities are higher than those on shorter-dated debt, which reflects the risks of holding bonds for longer periods. The yield curve is essentially a visual depiction of yields along the spectrum of maturities. “We’re moving into unforeseen places” in terms of the amounts of longer-term debt, he explains.Īlong with the Fed’s higher-for-longer message, this supply pressure has contributed to the unusual trend in one of the bond market’s most widely-watched measures: the shape of the yield curve. However, it’s now shifted those stepped-up debt sales to Treasury notes. Gwinn notes that until recent months, the Treasury had been handling its greater borrowing needs through the sale of bills. Not only does the government need to raise more money, but the Treasury is also shifting the kinds of debt it has been selling. On July 31, for example, the Treasury announced it needed to borrow more than $1 trillion in the third quarter- $274 billion more than it estimated in May. The wider deficit is translating into bigger Treasury auctions than markets expected. Rosner continues: “When you think about the fiscal situation, you want to think about: Is there a world in which there can be an improvement, like fiscal restraint? What is the appetite for tackling the fiscal spend, and a fiscal spend that continues to balloon?” That question is especially complicated around an election year, she notes. “When you lend money to any company, or in this case the government, you want to figure out: What does their fiscal house look like? What is their balance sheet?” For any bond buyer, “Part of the calculation is: Who are you actually lending to?” she says. Rosner says it’s not just the current trajectory of the deficit that has investors wary of paying up for longer-term bonds. A third issue was weaker-than-expected tax collections in 2022, which in part related to a big drop in capital gains taxes amid the bear market for stocks. Another was the impact of government spending, stemming from the big rise in cost-of-living adjustments on programs such as Social Security. ![]() One was the extent of interest rate increases and their knock-on effects on U.S. Gwinn points to several factors that caught most forecasters off-guard-both on Wall Street and in the government. Data as of Source, Congressional Budget Office, White House Office of Management and Budget Data through 2022 are actual levels, 2023 and forward are estimates.
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