Bloomberg News

WASHINGTON - The United States recorded a smaller budget deficit last month than a year ago, keeping the government on track for its third straight annual surplus.

The budget deficit narrowed to $41.7 billion in February, the fifth month of the fiscal year, from a deficit of $42.3 billion a year earlier, the Treasury Department said. Analysts had expected a $41.8 billion shortfall.

Even with a shortfall in February, "there's no doubt we are on our way to a record surplus," said William Sullivan, senior economist with Morgan Stanley Dean Witter in New York. "It's just a question of how much."

Fiscal conditions have been so positive that the Treasury is buying back debt. The government bought $1 billion in outstanding 30-year bonds last week, the second such buyback in two weeks.

The Treasury is planning to buy back as much as $30 billion in debt this year out of its roughly $3.3 trillion in publicly traded obligations. The government owes about $5.7 trillion, including Treasury securities held by the Social Security Administration.

The Treasury is conducting the buyback to reduce overall federal debt and save money. The government estimates it can save more than $1 billion annually for every 3 basis points it trims off the average interest rate on the $3.3 trillion.

As of Feb. 28, the average interest rate on that debt, excluding inflation-adjusted securities, was 6.44%, according to Treasury statistics.

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