April 13, 2011 / 8:37 PM / 7 years ago

Bond market relieved at size of Obama deficit cut

NEW YORK (Reuters) - It lacked details, and quickly drew a crowd of critics across Capitol Hill, but President Barack Obama’s $4 trillion deficit cutting plan won over a notoriously skeptical bond market — at least for now.

Prices on U.S. government debt rose when news of Obama’s plan trickled into the market before his speech on Wednesday afternoon as traders applauded the size of his deficit reduction package.

Traders said the president picked an ambitious goal that, if pursued, would require the government to sell fewer bonds in the future and keep the nation in good standing with creditors.

“It’s a positive for bonds because it helps to preserve the triple-A credit rating of the United States,” said Tom Simons, money market economist at Jefferies & Co in New York.

Obama proposed cutting ballooning U.S. budget deficits by $4 trillion over 12 years and curbing deficits to 2.5 percent of gross domestic product in 2015 and 2 percent toward the end of the decade from the current 9.8 percent projected for 2011.

His plan would include ending Bush-era tax rates for the wealthiest Americans. He would also seek $770 billion in cuts to non-security discretionary spending by 2023, and savings of $480 billion from the Medicare and Medicaid health programs by 2023 and at least $1 trillion more by 2033.

Benchmark 10-year Treasury notes gained 8/32 in price, with the 10-year yield falling to 3.46 percent from 3.50 percent at the previous day’s close.


The plan also came amid low expectations that Obama and lawmakers from both parties could overcome the politically charged environment surrounding budget negotiations.

Republican leaders in the House of Representatives and the Senate have said they expect to continue budget talks past May 16, the date on which the U.S. will reach its debt issuance ceiling.

They said negotiations could stretch to July, when the possibility of a U.S. default on debt becomes real.

“The bond market has priced in the worst,” said Michael Cheah, senior portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey. “Any positive surprise will result in buying because the bond market has given up on Congress.”

The scale of the problem is enormous.

The non-partisan Congressional Budget Office projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP in 2011, with $10.43 trillion in publicly held debt outstanding at the end of the year.

This is significantly higher than deficit levels before the start of the financial crisis, which hovered in a range of 3 to 5 percent between 2002 and 2008. In 2009 the deficit was 11 percent of GDP and in 2010 it was 9.4 percent.

To be sure, Obama’s plan to reduce the deficit is still short on details and any solution will have to navigate its way through a divided Congress.

“This offers the financial markets the tantalizing prospect of the long dreamed-of Grand Compromise that would obviously be good for all dollar-denominated assets,” said Cary Leahey, senior economist and managing director at Decision Economics in New York.

“However, the devil is in the details and the details have to be dealt with, starting today.”

Additional reporting by Ellen Freilich and Al Yoon; Editing by Dan Grebler

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