Interest on Debt Tops $92 Billion in May, Expanding Deficit; Can Strong 10-Year Auction Rescue the Market?

TradingKey - On Wednesday, the US Treasury reported that the federal budget deficit expanded to $316 billion in May, with the year-to-date cumulative deficit reaching $1.36 trillion. For the third consecutive year, the fiscal deficit as a percentage of GDP has exceeded 6%, with the total debt soaring to $36.2 trillion. 

However, the same day's auction of 10-year Treasury notes performed unexpectedly well, offering the market a reprieve.

Tariff Revenue Hits Record High But Fails to Curb Deficit

Data released by the US Treasury on Wednesday showed that the US posted a fiscal deficit of $316 billion in May, a 9% decrease year-over-year. The total deficit for the current fiscal year so far stands at $1.36 trillion, marking a 14% increase compared to the same period last year.

May saw tariff revenues soaring to $23 billion, significantly higher than the previous year's figure and more than triple last year’s monthly average, setting a historic record. Fueled by robust tariff income, total revenue in May grew by 15% year-over-year to $371 billion, though expenditures also rose to $687 billion. Despite the surge in tariff revenues, the 8% increase in May's spending could not prevent the deficit from expanding.

US Treasury Secretary Bessant warned on Wednesday that the deficit-to-GDP ratio is between 6.5% and 6.7%, marking the third consecutive year it has surpassed 6%. He noted that such levels have only been seen during wartime, pandemics, or recessions, and expressed a desire to reduce it to 3%.

Culprit: $36.2 Trillion Debt Pushes Up Interest Payments

Currently, the total US federal debt stands at $36.2 trillion. Data reveals that interest payments alone exceeded $92 billion in May, making it the third-largest federal budget expenditure after Medicare and Social Security. 

The burden of debt-related interest spending is putting significant pressure on US finances. As of this fiscal year, cumulative interest payments have reached $776 billion, with full-year expectations exceeding $1.2 trillion.

Strong Demand for 10-Year Treasuries Signals Continued Faith in US Market

Despite mounting deficits and an impending debt crisis, Wednesday's auction of the 10-year US Treasury notes performed remarkably well, temporarily alleviating concerns about weak bond demand. 

On Wednesday, the US Treasury sold $39 billion in 10-year Treasury notes. The auction yielded a winning yield of 4.421%, about 0.6 basis points below the pre-auction market yield and 0.7 basis points lower than the pre-issuance yield of 4.428%, marking the fourth consecutive time the winning yield fell below the pre-issuance rate, indicating robust demand.

According to financial blog Zerohedge, the auction results were excellent, particularly given the current perilous environment for bond auctions. The market in the US appears to be in a frenzy to buy everything.

Currently, the yield on the 10-year Treasury is around 4.4%, while the 30-year Treasury yield is slightly above 4.9%, both hitting their lowest levels since June 6.