The cost of managing U.S. government debt has seen a significant rise of 25% in the first nine months of the fiscal year, hitting $652 billion and consequently exacerbating the federal deficit.
The federal deficit reached a staggering $1.39 trillion for the nine months through June, according to Treasury Department data. This represents a dramatic 170% increase when compared to the same period last year, Bloomberg reports.
Political Tussles On The Horizon
The expanding deficit could potentially feed into the Republican legislative agenda to slash federal spending, according to the Thursday report.
While an agreement was reached between the GOP, which holds power in the House, and the Biden administration to suspend the debt limit earlier in June, a renewed clash is expected over appropriations for the 2024 fiscal year commencing Oct. 1.
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Interest Rates As A Key Determinant
The rise in interest rates has played a pivotal role in driving the deficit.
Five-year Treasury yields stand at about 3.96%, in contrast to 1.35% at the commencement of last year. As securities with lower yields mature, the Treasury is set to face a continuous rise in the rates it pays on outstanding debt.
By the end of June, the weighted average interest on total outstanding debt was 2.76%, a figure that has not been exceeded since January 2012. This marks an increase from the 1.8% noted a year ago.
The value of US Treasury bonds maturing in the next three to seven years, as monitored by the iShares 3-7 Year Treasury Bond ETF IEI, is 10% lower than it was at the beginning of 2022.
The Revenue Aspect
Despite concerns regarding higher rates, Treasury Secretary Janet Yellen has downplayed these worries. She has rather highlighted that the ratio of interest payments to GDP, after accounting for inflation, remains at a historically low level.
One crucial factor that has contributed to the expanding deficit this year has been a dip in Treasury revenues, particularly due to a drop in the capital gains tax collection. The downturn in stocks, bonds and other assets last year meant fewer government receipts.
Inflation has also played a role in amplifying a variety of government expenditure items.
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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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