Andy Lees on the Surging Twin Deficits

United States – Ten year Treasury yields last traded at 3.58% - (Five year swap spreads last traded at 26.25bpts. The high yield ETF traded at 87.01). The US macro story yesterday was one of twin deficits. The April budget deficit rose to USD82.7bn, far higher than expected, and the first deficit in April since 1963/64. For the fiscal year which began in October, the budget deficit totalled USD799.7bn compared with USD802.3bn during the same period last year. Revenue and other income fell by 7.9%. Corporate tax receipts rose 8.9% to USD77.1bn whilst individual income tax receipts fell 11.6bn to USD500.8bn. Government spending jumped 14.2% to USD328bn. “With the recovery in place, we should be seeing higher revenue and lower outlays, not the other way around”, according to Brown Brothers Harriman.  The March trade deficit of USD40.4bn highlighted that the external borrowing is continuing to widen, so its not even as if the debt is being managed internally. What is worse I discovered a few days ago that the annual statement from the Medicare and Social Security Trustees has been delayed, which can only indicate a deteriorating picture. If I remember correctly, last year it had already started to show negative cash flow. Any job creation or growth that we see has to be put into the context therefore of a negative return on debt, which is not very good at the best of times, but down right awful when debt levels are as big as they are. The knowledge of this will surely limit job creation until there is evidence that the trends are reversing. Nevertheless, despite this being unsustainable in the long term, in the short term the G10 surprise index has jumped to 52.20, highlighting just how strong data is coming in relative to expectations.