Deficit Hits $2 Trillion, With a Month to Go in Fiscal Year

Treasury Secretary Bessent
By Yuval Rosenberg and Michael Rainey

Happy Wednesday! Here's what we're watching while waiting for tonight's Super Bowl rematch between the Seattle Seahawks and New England Patriots - er, we mean the GOP midterm convention in Dallas. Yeah, that's what we meant. 100%. We'll be watching that and not the NFL season kickoff or Aaron Judge's second game back or absolutely anything else. Really. For sure.

Investors Brush Off Bessent's Surge in Buybacks

The U.S. Treasury Department said Wednesday that it plans to buy $6 billion of government debt this week as part of an effort to reduce long-term borrowing costs and maintain liquidity in the bond market. The buyback operation, which triples the normal level of $2 billion per week, will continue at a higher level moving forward, Treasury said, with at least $4 billion in debt purchased each week for the next few months, and perhaps longer.

This week's buyback, which is scheduled for Thursday, will focus on 10- and 20-year Treasury bonds. Yields have been rising on those bonds, along with other durations, as investors confront the reality of persistent inflation, massive investment in artificial intelligence and rising government debt levels around the world.

Treasury Secretary Bessent said Tuesday that the buyback operation is intended to reduce the "fever that was building" in the bond markets.

The markets did not respond as hoped. Treasury yields rose after the announcement Wednesday, with the yield on long-duration bonds rising as much as 5 basis points in volatile trading, though yields fell back in later trading.

"It doesn't seem like the patient's feeling much better," Adam Josephson of Sakonnet Research wrote in a note, per Investopedia.

Later in the day, an auction of 10-year U.S. Treasury notes was met with solid demand, providing some measure of relief, though Treasury bond yields remained higher across the board.

A matter of size: Investors have largely dismissed Bessent's efforts to tame the bond market, seeing his buybacks as too small to make a meaningful difference.

Robert Tipp, chief investment strategist and head of global bonds at PGIM Credit, told CNBC that the announced buyback level was at the bottom of the range investors were hoping to see, with expectations running as high as $10 billion. "At the end of the day, the Treasury is issuing a spectacular amount of securities, and they're trying to control the price level at the back end of the curve with really what, in the big scheme of things, is not necessarily a major operation," he told CNBC.

Comparing Bessent's effort to that of the Treasury secretary who wrestled with the market turmoil of 2008, bond fund manager Mark Spindel of Potomac River Capital told CNBC that, "Hank Paulson's bazooka this is not."

Still, Bessent seems confident that he has the firepower to bend the market to his will. Defending recent interventions he made to support the Japanese yen, Bessent compared himself to the owner at a casino. "Whenever people say, oh well, Treasury secretary is taking a risk, it's my dream," he said. "I have asymmetric information. I am the house now. ... You can bet against me if you want."

Many investors are skeptical, though. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said the size issue has been a problem before. "The only way in which an intervention can cap interest rates is if it's so absurdly large as to dominate other factors," he said, per Politico. "The history of interventions is littered with the detritus of policymakers."

Stanley Druckenmiller, an investing legend who once served as a mentor to Bessent, warned the Treasury secretary in an opinion piece he wrote for The Wall Street Journal in August that his effort faces a very difficult road ahead. "Once markets believe Treasury is defending a price, every rise in yields becomes a test of official resolve, and the operations must grow to survive the tests," Druckenmiller wrote. "Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding."

Deficit Hits $2 Trillion in Fiscal Year 2026

The federal budget deficit came to an estimated $2.0 trillion in the first 11 months of the 2026 fiscal year, according to the latest monthly analysis from the Congressional Budget Office.

The total is $6 billion smaller than the total recorded in the first 11 months of fiscal year 2025, but that's largely due to calendar effects, such as the timing of Labor Day, CBO said. If not for those effects, the deficit in 2026 would be $82 billion larger than last year.

From October 2025 through August 2026, federal receipts totaled $4.8 trillion, a 3% increase from a year ago. Ignoring timing shifts, outlays came to $6.8 trillion, a 4% increase.

Calling for Congress to act now to cut deficits, the deficit hawks at the Committee for a Responsible Federal Budget noted that the latest data comes as the nation's fiscal outlook is already facing enormous challenges. "Such extraordinarily high deficits are just one piece of our fiscal situation that is falling apart," CRFB's Maya MacGuineas said in a statement. "The gross national debt recently hit the sobering milestone of $40 trillion; we're now spending more on yearly interest costs than on our national defense; debt held by the public exceeds the size of our entire economy; and trust funds for programs that tens of millions of Americans rely on face insolvency in less than a decade."

Biden Law Cuts Medicare Out-of-Pocket Drug Costs, but Drives Higher Program Spending

The Inflation Reduction Act passed by Democrats and signed into law by President Joe Biden in 2022 enacted major changes to Medicare's Part D prescription drug benefit, including an annual cap on beneficiaries' out-of-pocket drug costs

That cap - which started at $2,000 for 2025, is $2,100 this year, and is expected to rise to $2,400 for 2027 - has helped slash expenses and "substantially improved patient access to high-cost medications for Medicare-insured patients," according to a study published at JAMA Health Forum in June.

But, as Axios's Adriel Bettelheim reports, the increased demand for those expensive drugs means there are now signs that the Medicare prescription drug reform is "dramatically driving up program spending," with the cost shifted to taxpayers, insurers and drugmakers.

A presentation released last week by the Medicare Payment Advisory Commission (MedPAC), a nonpartisan agency that provides Congress with analysis and advice on Medicare, says that the benefit redesign "reduced cost sharing and improved affordability for enrollees with high drug spending," but adds that the changes also increased Part D spending.

Out-of-pocket spending for enrollees who do not receive a federal low-income subsidy declined by 25%, or $200, on average from 2023 to 2025, the MedPac report says. Cost sharing declined by 30% - and by 50% among the top 10% of highest-spending enrollees - but program spending per enrollee rose by 30% over the same period.

The Medicare advisory agency said that 22% of enrollees hit the $2,000 out-of-pocket limit in 2025, and average gross spending per enrollee rose 18% to $5,950. That means that about two-thirds of the Part D drug spending was above the out-of-pocket limit, when enrollees don't pay for covered medications.

"Policy experts say the findings are important because Medicare drug plans have limited ability to control spending once enrollees hit the patient cost cap and face no cost sharing," Axios's Bettelheim writes. "But shifting more costs back onto seniors or cutting benefits could exacerbate health affordability concerns that already are leading some to skip medications and are driving up medical debt."

Those affordability concerns are set to grow anyway, as a Biden-era Medicare drug subsidy for insurers is set to expire at the end of this year and a temporary 6% annual cap on base premium growth, also part of the Inflation Reduction Act, is set to expire at the end of 2029, raising fears of a sharp jump in baseline premiums in 2030.

The bottom line: Medicare's trustees projected in June that Part D expenditures will climb from $181.5 billion in 2025 to $222.4 billion this year and $236.2 billion in 2027. By 2035, Part D costs are expected to hit $346.7 billion. Seniors may see more of those drug costs shifted back onto them in the coming years, and lawmakers could face increased pressure to enact additional cost-cutting reforms.

Quote of the Day

"The people building AI earnestly believe that it could kill us all by the end of the decade."

-Jacob Coxon, a researcher at AI company Anthropic who specializes in training new models, in a series of posts on X explaining that he had quit the company and believes that it and OpenAI are not acting responsibly and are "racing straight to self-improving superintelligence and gambling with our lives."

As concerns about AI safety mount, Coxon's warned that the companies developing the technology won't be able to control it.

"Do not underestimate the power of this technology," Coxon wrote on Tuesday evening. "These will soon be superhuman systems that can hack anything, revolutionize any field overnight, and acquire real power and resources. We have all witnessed the progress in each of these domains, and progress is not slowing." He added: "No other human activity poses this level of danger."

After Coxon issued his warning, a top scientist at Anthropic wrote in his own post on X that he thinks Coxon is right: "Jacob is correct here-we really do earnestly believe AI could kill all humans! I personally think it is >10% within the next decade. I believe Anthropic is trying its best, but we do not yet have a plan to solve alignment for superintelligence and are not clearly on track to."

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