US fiscal path unsustainable despite improved budget forecasts, says DoubleLine By Reuters
Davide Barbuscia
NEW YORK (Reuters) – The U.S. national debt profile remains on an unsustainable path with the deficit likely to increase more than the Congressional Budget Office recently projected, an analyst at investment firm DoubleLine said on Tuesday.
The CBO, the nonpartisan budget agency, last week released new forecasts of US budget deficits for the next 10 years. They showed a slightly improved fiscal picture compared to the previous outlook released in June 2024.
Debt to gross domestic product, a key indicator of the nation’s fiscal health, is now estimated to rise to 118.5% by 2035 from about 98% last year, the CBO said Friday, lower than the debt-to-GDP ratio of 122% by 2035. 2034 he predicted last year.
Those projections, however, are “very optimistic,” said Ryan Kimmel, an analyst at bond-focused investment firm DoubleLine, given expectations for President Donald Trump’s tax cuts. They are also based on more dovish views on the level of interest rates, he said.
“If you adjust those rate assumptions by very small amounts, the debt dynamic worsens dramatically … the unsustainable debt dynamic remains in place,” he said in an interview.
CBO’s estimates are based on existing laws and assume that the tax cuts signed by Trump while 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 tax rates for individuals and small businesses, it could increase deficits by more than $4 trillion over the next 10 years, the CBO previously estimated.
CBO projects that the effective federal funds rate, as well as yields on three-month Treasury bills, will remain below 4% from next year through 2035.
“With the whole (yield) curve right now above 4%, it could be a little challenging to get there, especially if you have a more optimistic growth forecast that should translate into higher interest rates,” Kimmel said. Benchmark 10-year yields were last around 4.6%, while interest rates are currently in the 4.25%-4.5% range.
Truth be told, Trump’s Treasury Secretary pick, Scott Bessent, said last week that high deficits in recent years were caused by a “spending problem” — an admission 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 worsening fiscal outlook, which will likely require the U.S. government to issue more debt, DoubleLine is betting that long-term government bond yields will continue to rise, Kimmel said.
“We don’t think debt dynamics are positive for the long end of the yield curve … We’ve seen the curve steepen quite a bit, but we think there’s still room for a steeper curve.”
