Fiscal 2026 deficit was over US$2 Trillion as updated in the recent treasury statement. This week we find out how the Treasury will finance that debt.
The numbers are “dismal” in the words of the Congressional Budget Office. The U.S. spent more than $1 Trillion on interest costs alone. “America’s fiscal health is failing, and we need to take action to address it. In the year ahead, our leaders should avoid adding any new borrowing – on top of what we are already projected to – and commit to finding twice as many savings for every new must-have cost incurred.”
The biggest growth category of the deficit is the cost of financing it (pink area). While it’s true that cost of spending is income to the holders of the debt, and that money does get back into the economy, it takes away from other discretionary spending. Believe it or not, the U.S. government actually ran surpluses for several years during the internet birth and boom in the back half of the 1990s. In early 2000, the U.S. Treasury cancelled issuance of the long bond. Followed shortly after by massive tax cuts under Bush that ramped deficits again. It does not matter who is in the White House or Congress, they all spend our tax dollars rather poorly.
The average cost of financing that now $40 Trillion in debt is 3.518 per cent and rising quickly. This week, the U.S. Treasury will tell us their plans for financing over the next few quarters. The Quarterly Refunding Announcement and how they fund the deficit is important. Some are calling for them to cancel the 20-year issuance, others think they should add more bills over bonds at this point.
Many will recall that my top pick back in mid-May was the U.S. long bond ETF looking out for 2027. So far, it’s been a volatile ride. Long bonds have the same standard deviation as the S&P 500 historically. If stocks are over valued and the economy is set to slow with gridlock in Washington, the U.S. Treasury will make moves to lower the long bond issuance, we will be right in the trade.
