The Tell: Why the ‘abnormally large’ U.S. deficit is a worry ‘big time’ for stocks and bonds, says Yardeni

by | Sep 11, 2023 | Stock Market

The ballooning U.S. federal deficit is “worrying investors big time,” including about the bond market’s ability to finance the shortfall at current interest rates, according to Yardeni Research.  The federal deficit has swelled to $2.3 trillion on a 12-month sum basis through July, analysts at Yardeni Research said in a note Monday. That’s after narrowing to a recent low of $1 trillion through July 2022, from a record $4.1 trillion through March 2021, according to the team.

It’s “highly unusual” for the federal deficit to be rising as a percentage of nominal gross domestic product when the economy is growing and the unemployment rate is near record lows, according to Yardeni. By contrast, the deficit “always widens during economic recessions,” as tax receipts decline and outlays increase during those times as the government takes steps aimed at boosting the economy, the analysts said. With the U.S. federal deficit now “abnormally large,” inflation would need to continue moderating for the yield on the 10-year Treasury note to remain in its recent range, according to the note. “In a rebounding inflation scenario, the federal deficit obviously would exacerbate the rise in the bond yield,” said Yardeni analysts. “Tha …

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