The US federal budget deficit for August hit $345.0 billion, exceeding the expected $285.5 billion. This is also up from July’s deficit of $291 billion and lower than August’s deficit of $371 billion last year.

Year to Date Deficit

So far this year, the deficit has reached $1.973 trillion, compared to $1.897 trillion at this time last year. In August, government spending was $689 billion, slightly above last August’s $687 billion. Meanwhile, receipts rose to $344 billion from $307 billion in August of the previous year. Tariff revenue has generated about $88 billion to date. The current projection suggests this could reach between $200 billion and $250 billion, which still won’t be enough to cover the deficit from July. The August deficit numbers were larger than expected, confirming the ongoing issue of heavy government spending. This means the Treasury will continue to issue a lot of debt to make up the gap. For traders, this could lead to rising longer-term bond yields. This fiscal strain comes at a tough time, as the latest August Consumer Price Index (CPI) data shows inflation remains stubbornly above the target at 3.1%. This complicates matters for the Federal Reserve, making it difficult for them to think about rate cuts anytime soon. We will likely keep the policy rate at 4.75% until the end of the year.

Higher Market Volatility

As a result, we can expect increased market volatility. The VIX has already risen to 18 from the low teens seen earlier this summer. Options traders may want to consider buying protective options or strategies that benefit from larger price movements in stocks. There could also be opportunities in yield curve steepener trades, where one bets that long-term yields will rise faster than short-term yields. This isn’t a new trend; persistent deficits in 2023 and 2024 caused volatility in the bond market and affected anyone going against the trend of increasing yields. Looking ahead, we will closely monitor the upcoming 10- and 30-year Treasury auctions for signs of weak demand. A disappointing auction could trigger another rise in rates. Create your live VT Markets account and start trading now.

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