Why do Investors Care?
The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises.

The Federal government borrows money through the issuance of Treasury securities; so lower deficits mean a smaller supply of securities and (again, assuming constant demand) higher prices. With notes and bonds, higher prices are equated with lower yields, so in this example, the government gets to borrow money at lower interest rates. That impact ripples across all other interest rate-bearing securities and creates a lower interest-rate environment for stocks, which is bullish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts have been a key reason for the improved deficit situation in recent years, and they reflect the strong economic conditions.