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Budget deficit on an easing path

WASHINGTON (Reuters) - The budget deficit fell in May compared to a year ago but remains on track to easily exceed $1 trillion, a Treasury Department report showed on Thursday.

As Washington debates ways to cut government spending, the Treasury said the deficit so far this fiscal year, starting in October 2009, was $935.61 billion, down from around $992 billion in the same period last year. The total deficit for fiscal 2009 was $1.42 trillion.

In May, the budget gap was $135.93 billion in May, slightly smaller than forecast, following a $82.69 billion shortfall in April. The May deficit stood at $189.65 billion last year.

The string of monthly deficits, the longest on record, was amassed in part because of spending and tax breaks by the government to rekindle economic activity after the worst recession in 2008-2009 since the Great Depression.

Outlays were $282.72 billion in May but receipts came in at just $146.80 billion. Still, that was up from a year earlier, when receipts stood at $117.22 billion.

Deficits have become a huge point of contention in Washington. Some argue it is only a matter of time before investors lose confidence in U.S. bonds and send market interest rates sharply higher. Others, however, say government spending is a needed antidote to lingering economic weakness, and has yet to spark any perceptible aversion to Treasuries among global investors.

If anything, Treasury yields remain relatively low despite record supply, as investors favor the perceived safety of U.S. government debt amid an ongoing crisis of confidence in the sovereign obligations of key European nations.

Benchmark 10-year notes are currently yielding 3.30 percent, down sharply from readings around 4 percent seen in early April.

(Reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci)