Government Budget Deficit

If the Government spends much more than it gets in from tax revenue, it runs a budget deficit. This deficit should be covered or financed either via printing more or borrowing money. The US Government has in the past utilized the two ways of financing its deficit in a balanced way. The effect in interest rates is where the deficit is financed through borrowing or printing. The Government would borrow in the S.T market that increase the demand of available funds for lending such subsequently pushes the interest rates up.

If the Government prints much more money it will lead to inflation and the interest rate would eventually rise. Hence the larger the Government deficit, and the higher the level of interest rates.