U.S. January deficit narrows to $95B as receipts rise 9%—tariffs and lower interest help
The U.S. federal budget deficit fell to $95 billion in January, a $34 billion improvement year-over-year, driven by a 9% jump in receipts to $560 billion while spending rose 2% to $655 billion. Adjusted for calendar effects, the January deficit would be about $30 billion, down 63% from last year. Year-to-date (fiscal year since Oct. 1) the deficit is $697 billion, 17% lower than a year earlier. Key drivers: customs duties surged to $27.7 billion in January (four times January 2025 levels) and $117.7 billion year-to-date, largely due to renewed tariffs; interest payments fell $12 billion in January to $72 billion because of delayed inflation-related bond payments, though fiscal-year interest remains a record $426 billion. The Congressional Budget Office projects deficits will widen over the next decade—adding $1.4 trillion to deficits by 2035 and predicting annual deficits could reach $3.1 trillion by 2036—partly reflecting recent tax and spending legislation and immigration measures, with tariffs partially offsetting costs. Treasury auctions showed weak demand for 10-year notes this week, pushing yields higher and forcing primary dealers to absorb unsold supply. Traders and policymakers face rising borrowing needs, higher yields, and potential volatility in bond markets that can spill over into mortgage rates and broader financial conditions.
Bearish
This fiscal update is bearish for crypto markets primarily because weaker Treasury auction demand and rising long-term yields increase funding costs and risk-off sentiment. Key factors: 1) Higher deficits over the medium term imply more Treasury issuance, putting upward pressure on yields. Crypto, particularly Bitcoin, can react negatively to rising yields as alternative rates of return increase and liquidity tightens. 2) The immediate weak demand in the 10-year auction pushed yields higher; higher yields historically correlate with short-term outflows from risk assets, including cryptocurrencies. 3) Although tariffs temporarily improved receipts, the CBO’s projection of larger deficits by 2035–36 signals persistent fiscal strain that could raise market volatility and regulatory scrutiny. Short-term impact: elevated volatility, potential price weakness for high-beta crypto assets, and tighter liquidity as yields rise. Long-term impact: mixed—sustained high deficits and inflation fears can support crypto as an inflation hedge narrative, but persistent rising yields and tighter financial conditions could cap speculative upside. Comparable past events: 2022–2023 episodes when rising Treasury yields coincided with crypto drawdowns; similarly, weak auction results in 2024–25 produced short-term risk-off moves across crypto and equities. Traders should watch Treasury supply schedules, auction demand metrics, 10-year yields, and liquidity indicators; reduce leverage and set tighter risk controls until auction demand stabilizes and yield pressure abates.