Gavin W. Stephens

Chief Investment Officer

May 1, 2024: Why Budget Deficits Matter

This week, investors will digest a litany of economic data, including updates on the U.S. job market and on manufacturing and service activity. These releases come amid a busy week of corporate earnings releases and a meeting of the Federal Reserve. Potentially lost in this deluge of data is the U.S. Treasury’s announcement of its forthcoming borrowing needs and expected bond auctions.


While this last announcement may not generate many headlines, bond investors will nonetheless pay close attention to it. Last July, the U.S. Treasury surprised markets by announcing that it would borrow $1 trillion over the ensuing three months to finance an increasing budget deficit. That borrowing resulted in a growing supply of U.S. Treasury bonds, which helped push bond prices lower and thus bond yields higher. It is no coincidence that 10-year Treasury yields reached their high last year following increased scrutiny of growing debt supply.


That scrutiny will continue in the years ahead. While budget deficits are nothing new, an expanding deficit in a period of historically low unemployment is new. Health-care costs, military expenditures, and a growing interest burden—these factors, among others, signal that the demand for federal spending will continue. For much of the past four decades, bond yields fell as the deficit grew. Whether that continues now seems to be in question.


Weekly Market Update: May 1, 2024