2012 Budget Deficit Approaches $1T: Portfolio Positioning

by: Kirk Lindstrom

On Friday, August 10, 2012, the US Treasury Department reported that the U.S. Government had a budget deficit of $69.7B for the month of July.

Year 2012 2011
$B $B
July Receipts 184.6 159.1
July Outlays 254.2 288.4
July Surplus (Deficit) (69.6) (129.4)
Deficit as percent of Outlays 27.4% 44.9%
2012 Year-To-Date $B
Year-to-date Receipts 2,008.7
Year-to-date Outlays 2,982.5
Year-to-date Surplus (Deficit) (973.8)
Deficit as percent of Outlays 32.7%

This shows the information graphically.

The stock and bond markets took the news in stride with mixed results:

All four major stock market index ETFs, (DIA, SPY, VTI and QQQ) were up, while the bond market represented by five major index funds (AGG, BND, LAG, SCHZ and TIP) showed mixed results.

Ticker Name 8/10/12
Change Yield %
DIA SPDR Dow Jones Industrial Average 131.93 0.36 2.44
SPY SPDR S&P 500 140.84 0.23 1.93
VTI Vanguard Total Stock Market ETF 71.86 0.14 1.99
QQQ PowerShares QQQ 66.86 0.04 -
AGG iShares Barclays Aggregate Bond 111.87 0.18 3.54
BND Vanguard Total Bond Market ETF 84.68 0.10 3.51
LAG SPDR Barclays Capital Aggregate Bond 58.95 -0.02 3.16
SCHZ Schwab U.S. Aggregate Bond ETF 52.56 -0.06 -
TIP iShares Barclays TIPS Bond 120.56 0.08 2.48

Bonds vs. Stocks

Currently the 10-year US Treasury bond (Treasury rates at a glance) yields only 1.64% as investors continue to fear stocks and European debt for the relative safety of US debt. DIA, SPY and VTI pay a dividend higher than the 10-year US treasury bond. This could change if the US government continues to spend far more than it takes in and investors lose faith in getting paid back like we saw in Greece.

I doubt the US will default on treasury debt but it will probably continue to dilute the value of the dollar by having the Fed print money to buy US debt to keep rates artificially low. This will eventually lead to inflation so I own equities like SPY and the index fund version of VTI along with individual TIPS.

Disclosure: I am long SPY.

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