The federal government's deficit nearly tripled in the first nine months of the fiscal year, a surge that's bound to raise concerns about the country's rising debt levels.
The Treasury Department said Thursday that the budget gap from October through June was nearly $1.4 trillion, a 170 percent increase from the same period a year earlier. The federal government operates under a fiscal year that begins October 1.
The shortfall adds to an already large federal debt — estimated at more than $32 trillion. Financing that debt is increasingly expensive as a result of rising interest rates. Interest payments over the last nine months reached $652 billion, 25 percent more than during a same period a year ago.
To finance the rising deficit, the U.S. Treasury is expected to issue a deluge of government bonds into the market. Interest rates most certainly will move higher to find willing buyers for this increased supply.
The above chart, which I think is an important one in the current environment, shows why this debt explosion is worrisome for all markets.
The spike in interest rates over the past couple years was one of the primary reasons stocks sold off during that time. The red line above is the price of treasury bonds going lower (which means interest rates are moving higher). You can see the Nasdaq moving lower at the same time. After heading lower in the first part of 2023, rates are back to the high point of the year. Stocks, however, have so far ignored what is happening to rates and have continued the rally. At some point, this gap will close as the higher yield in bonds becomes more attractive to investors relative to stocks.
With more than $1 trillion in new government debt being sold in the coming quarter to fund the deficit mentioned above, it is hard to envision bond prices moving higher as the mechanism of this happening.