financetom
Economy
financetom
/
Economy
/
US fiscal path unsustainable despite improved budget forecasts, says DoubleLine
News World Market Environment Technology Personal Finance Politics Retail Business Economy Cryptocurrency Forex Stocks Market Commodities
US fiscal path unsustainable despite improved budget forecasts, says DoubleLine
Jan 21, 2025 2:49 PM

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 10-year Treasury notes 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."

Comments
Welcome to financetom comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Related Articles >
Federal Reserve 'Moving Closer To A Rate Cut' Amid Softening Economy And Inflation Trends: Report
Federal Reserve 'Moving Closer To A Rate Cut' Amid Softening Economy And Inflation Trends: Report
Jul 29, 2024
The Federal Reserve is anticipated to maintain its current interest rates, but a potential rate cut in September is on the horizon. This is due to favorable changes in U.S. inflation and a softening labor market. What Happened: The Federal Open Market Committee is expected to keep the benchmark interest rate at 5.25% to 5.50% when it concludes its two-day...
Explainer-The Fed nears its 2% solution after a punishing bout of rising prices
Explainer-The Fed nears its 2% solution after a punishing bout of rising prices
Jul 29, 2024
WASHINGTON (Reuters) - Inflation is nearing the Federal Reserve's 2% target, and the central bank is expected to begin cutting interest rates as soon as September. While it may take a while for the pace of price increases to fall all the way to 2% - and policymakers will be sensitive to signs inflation is taking off again - the...
Fed likely to hold rates steady one last time as inflation fight finale unfolds
Fed likely to hold rates steady one last time as inflation fight finale unfolds
Jul 29, 2024
WASHINGTON (Reuters) - The Federal Reserve is expected to hold interest rates steady at a two-day policy meeting this week but open the door to interest rate cuts as soon as September by acknowledging inflation has edged nearer to the U.S. central bank's 2% target. Policymakers in advance of the July 30-31 meeting were reluctant to commit to the timing...
US Dollar Rises Early Monday, Focus on FOMC, July Employment Report
US Dollar Rises Early Monday, Focus on FOMC, July Employment Report
Jul 29, 2024
07:40 AM EDT, 07/29/2024 (MT Newswires) -- The US dollar rose against its major trading partners early Monday, except for a decline versus the yen, as markets face a busy week that includes the Federal Open Market Committee meeting and the employment report for July. The week starts out light with the Dallas Federal Reserve's manufacturing reading for July at...
Copyright 2023-2026 - www.financetom.com All Rights Reserved