The sharp deterioration in the US budget position, in one chart

Having improved in the years following the global financial crisis on the back of improved economic conditions and spending restraint, the US government’s budget position is deteriorating yet again.

That point was rammed home earlier this week with the release of data from the US Treasury Department revealing a monthly budget deficit of $215 billion in February, the largest since 2012.

While February is usually a seasonally weak month for finances, it’s an ugly number nonetheless.

Over the year, spending rose by 2% while incomes fell 9.4%, the latter starting to reflect recent corporate and personal tax cuts in December last year.

As seen in the chart below, the US deficit is getting larger again.

Source: Westpac Bank

To Sean Callow, Senior Currency Strategist at Westpac Bank, larger government deficits, coming at a time when the US Federal Reserve is reducing the size of its balance sheet by allowing maturing assets it purchased as part of its QE programs to run-off, could have large and lasting impacts on both US bond yields and the US dollar.

“The budget deficit narrowed sharply in 2010-2014 as the economy recovered and the 2011 Budget Control Act restricted spending,” he says.

“This phase is firmly in the rear view mirror, just as the Fed is shrinking its holdings of treasuries bought under the QE programs.

“This is a heavy burden for US treasuries and a potential danger for the dollar this year too.”

And given the stock market reaction to higher bond yields in early February, that danger may well extend to other asset classes as well.

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