U.S. Borrowing Costs Stay Stable. For Now

By PAUL VIGNA

The federal deficit has plenty of investors concerned. But they aren't making the government compensate them for their worries.

The Treasury Department releases its monthly budget statement Wednesday at 2 p.m. Analysts surveyed by Dow Jones expect a deficit of about $220 billion, wider than last February's $193 billion deficit, with the U.S. government heading toward a $1.35 trillion hole for the fiscal year ending this September, according to the Congressional Budget Office.

The budget report isn't a market mover, one reason it gets released during market hours. In the short run, investors are more or less "comfortable" with large deficits, says Dan Greenhaus, Miller Tabak's chief economic strategist.

Long term, though, is different. "The lack of a credible plan to reduce the deficit as a percentage of GDP will eventually weigh on investors' minds, which could have implications for currency and debt markets," Mr. Greenhaus says.

Erasing the deficit seems intractable, because much of it—like health care and Social Security—is mandated. Military spending isn't, but isn't likely to come down amid two wars. The next-biggest government outlay is interest on the debt. And that is where the debt markets get, well, interested.

The U.S. government paid $187 billion in interest last year, and is projected to pay $209 billion this year, according to the CBO. But that is down from $253 billion in 2008, since government debt being issued now has a lower yield than the debt being redeemed, says David Resler, chief economist at Nomura Securities.

Last year, the government issued mainly short-term debt, which carried lower yields. The Treasury is auctioning off more long-term debt this year. That will put funding on a more stable footing, but also drives up interest payments. This week's auction of $74 billion in notes and bonds includes $21 billion of 10-year notes Wednesday.

If investors think the government isn't serious about getting the deficit down, they could demand higher yields, which would boost the government's costs. That dynamic is playing out in Greece.

So far, though, bond buyers' worst worries haven't crossed the seas. "We don't have rising rates," Mr. Resler says.