Mounting deficits spark jitters about U.S. economy

By Mark Felsenthal
WASHINGTON (Reuters) - Gaping U.S. trade and budget deficits and a weak auction of government debt that pushed interest rates higher pointed to a bumpy road to recovery for the world's largest economy on Wednesday.
A Federal Reserve report noting businesses see some signs of moderation in the contraction, even though conditions were weak or deteriorated further in May, failed to ease anxiety about the economy.
Instead, financial markets found new reasons to worry that massive government spending and Fed cash infusions will lead to dangerous inflation and undercut any fledgling rebound.
A government bond auction pushed yields on the benchmark 10-year Treasury note above 4.0 percent for the first time in eight months, suggesting investors want the government to pay a premium to finance its huge deficit.
U.S. stocks ended little changed though, with the three month rally stalling on worry that rising interest rates could dampen consumer and business spending.
"The risk of rising yields should not be discounted," said Joseph Brusuelas of Moody's Economy.com. "If continued, they will reduce home mortgage refinancing and curtail corporate borrowing, both critical to an economic recovery."
Federal Reserve and U.S. Treasury Department officials have cited recent economic data and relative calm in financial markets as hopeful signs that a deep recession begun in December 2007 may be approaching its bottom.
But a sharp upswing in longer-term Treasury bond yields in recent weeks, spurred by worries over the burgeoning government budget deficit, threatens to derail any renewal of consumer spending or home buying.
The rise in bond yields has come despite the Fed's pledge to buy $300 billion in long-term Treasury securities to lower borrowing costs and stimulate economic activity.
BUDGET, TRADE GAPS WIDEN
The federal budget deficit logged a bigger-than-expected $189.7 billion in May, the U.S. Treasury reported on Wednesday. The nation's trade gap also widened to $29.2 billion in April, another report showed.
The White House last month forecast the fiscal deficit for 2009 will total $1.84 trillion, more than four times the record deficit of $455 billion in 2008.
Global worries about the sustainability of those deficits were emphasized by an announcement from Russia's central bank that it would cut the share of U.S. Treasuries in its $400 billion reserves.
Higher long-term bond yields have already driven up home mortgage interest rates and shriveled the number of home loan applications. The average 30-year fixed-rate mortgage jumped to 5.57 percent last week, well above the record low of 4.61 percent set in March.
An index of mortgage applications by the Mortgage Bankers Association registered a 7.2 percent drop to a four-month low. Continued...
Source: Reuters