US fiscal path unsustainable despite improved budget forecasts, says DoubleLine
2025.01.21 17:53
By Davide Barbuscia
NEW YORK (Reuters) – The U.S. sovereign debt profile remains on an unsustainable path with deficits likely to widen more than what has been recently projected by the Congressional Budget Office, an analyst at investment firm DoubleLine said on Tuesday.
The CBO, a non-partisan budget agency, last week issued fresh forecasts for the U.S. budget deficits for the next 10 years. They showed a slightly improved fiscal picture compared to its previous outlook published in June 2024.
Debt to gross domestic product, a key metric of a country’s fiscal health, is now estimated to grow to 118.5% by 2035 from about 98% last year, the CBO said on Friday, lower than the 122% debt-to-GDP ratio by 2034 it had forecast last year.
Those projections, however, are “very optimistic,” said Ryan Kimmel, an analyst at the bond-focused investment firm DoubleLine, given expectations of tax cuts by President Donald Trump. They are also based on dovish views on the level of interest rates, he said.
“If you tweak those rate assumptions by very small amounts, the debt dynamic deteriorates quite dramatically … the unsustainable debt dynamics still remain in place,” he said in an interview.
The CBO’s estimates are based on existing laws and assume that the tax cuts Trump signed into law when he was president in 2017 will expire as planned at the end of this year.
If Trump, who returned to the White House on Monday, and Republicans in Congress succeed in extending the current individual and small business tax rates, this could increase deficits by over $4 trillion over the next 10 years, the CBO has previously estimated.
The CBO projects that the effective federal funds rate, as well as yields on three-month Treasury bills and will remain below 4% from next year until 2035.
“Given that the entire (yield) curve right now is above 4%, it might be a bit challenging to get there, especially if you have this more optimistic growth outlook that should feed through into higher interest rates,” said Kimmel. Benchmark 10-year yields were last at about 4.6%, while interest rates are currently in a 4.25%-4.5% range.
To be sure, Trump’s pick for Treasury Secretary Scott Bessent said last week that high deficits in recent years were due to a “spending problem” – an acknowledgment that Kimmel said was a positive signal. But there was still little clarity from the Trump administration on the fiscal front, he added.
Given expectations of a deteriorating fiscal outlook, which will likely require the U.S. government to issue more debt, DoubleLine is betting long-term Treasury yields will keep rising, said Kimmel.
“We don’t think that the debt dynamic is positive for the long end of the yield curve … We’ve seen the curve steepen quite a bit, but we think that there’s still some room for the curve to steepen.”
