Insights 
VT 
The US federal budget deficit for August reached $345.0 billion, surpassing the expected $285.5 billion. In comparison, July’s deficit was $291 billion, and the deficit in August the previous year was $371 billion.
Year to Date Deficit
The year-to-date deficit stands at $1.973 trillion, compared to last year’s $1.897 trillion at the same point. August saw outlays of $689 billion, slightly higher than the $687 billion recorded last August. Receipts increased to $344 billion from $307 billion in August of the prior year.
Revenue generated from tariffs has amounted to approximately $88 billion so far. The current run rate is projected to be between $200 billion and $250 billion, which still falls short of covering the deficit incurred in July.
The August deficit numbers came in wider than expected, confirming what we already knew about unsustainable government spending. This means the Treasury will need to keep issuing a massive amount of debt to cover the shortfall. For traders, this points to continued upward pressure on longer-term bond yields.
This fiscal pressure is happening at a tricky time, with the latest August CPI data showing inflation is still stubbornly above target at 3.1%. This environment basically ties the Federal Reserve’s hands, making it very difficult for them to consider rate cuts anytime soon. We’re likely stuck with the policy rate at 4.75% through the end of the year.
Higher Market Volatility
We see this translating into higher market volatility, and the VIX has already crept up to 18 from the low teens earlier this summer. Options traders might consider buying protection or structures that benefit from wider price swings in equities. There could also be value in yield curve steepener trades, betting that long-term yields will rise faster than short-term ones.
This isn’t a new story; we saw how the persistent deficits back in 2023 and 2024 fueled bond market volatility and punished anyone fighting the trend of higher yields. Looking ahead, we’ll be watching the upcoming 10- and 30-year Treasury auctions very closely for signs of weak demand. Another poor auction could be the catalyst for the next leg up in rates.
