(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, May 29 (Reuters) - Few would disagree

that U.S. public finances are deteriorating, but debt Cassandras

have been warning of a fiscal day of reckoning for 40 years and

it has yet to arrive, so why should this time be any different?

The non-partisan Congressional Budget Office's baseline

forecast sees federal debt held by the public rising to 117% of

GDP over the next decade from 98% last year, and net interest

payments rising to 4% of GDP, a sixth of all federal spending.

While these eye-watering figures are concerning, it still

seems difficult to fathom the United States experiencing a

genuine debt crisis where investors turn their backs on

Treasuries and the dollar, the two cornerstones of the global

financial system.

Both should enjoy strong demand - at least for the

foreseeable future - even if their prices may need to fall to

attract buyers. And in times of extreme crisis, like 2008 and

2020, the Fed can always buy huge quantities of U.S. bonds to

stabilize the market.

But that doesn't mean investors should ignore the swelling

tide of fiscal gloom. We may not see a full-blown debt crisis,

but there's a sense that "the fiscal" matters for markets more

now than it has for decades.

ECONOMIC ASSUMPTIONS

To better understand the risk at hand, it's useful to

explore the assumptions baked into the current U.S. debt and

deficit projections.

The CBO's comprehensive fiscal projections are a benchmark

for many policymakers and investors. But amid the fog of

uncertainty created by U.S. President Donald Trump's trade war,

the baseline economic assumptions underlying this outlook may be

too optimistic.

The CBO assumes that the United States will experience

continuous, uninterrupted economic growth over the next decade.

While it's true that since 1990 the U.S. economy has twice gone

on streaks of more than a decade without experiencing a

recession, conditions today - not the least of which is the

country's bloated public debt burden - suggest that a repeat is

highly unlikely.

And in the event of a downturn, U.S. public finances would

almost certainly suffer the double whammy of shrinking tax

receipts and a surge in benefit payments, pushing the country

closer to a fiscal cliff.

Of course, an economic downturn would probably also prompt

the Fed to lower interest rates, which would likely cause bond

yields to fall and offer some relief on debt-servicing costs.

But investor angst over the debt may keep market-based

borrowing costs higher than they would otherwise be, something

that is also not baked into the CBO's central projections.

And if government borrowing costs over the next decade are

higher than currently projected, the U.S. fiscal picture is even

more troublesome than thought.

YIELD CURVE ASSUMPTIONS

Yield curve assumptions play a major - and often

underappreciated - role in U.S. debt sustainability projections.

The current CBO projections are based on the expectation

that the yield curve will "normalize" in the coming year. They

assume that the three-month Treasury yield will fall to 3.2% and

the 10-year yield will settle at 3.9%. But what if the yield

curve stays near current levels over the next decade, with a

three-month rate of 4.40% and a 10-year yield of 4.50%?

Chris Marsh at Exante Data crunches the numbers and finds

that, in this scenario, federal debt held by the public could

rise to 125% of GDP by 2034 and interest payments as a share of

revenue would approach 30%.

Interest payments as a share of revenues are already about

to exceed their late-1980s peak and may end up at the highest

level since at least the 1950s.

Adding to this concern, Saul Eslake and John Llewellyn at

Independent Economics note that if the yield curve does not

normalize, the United States could get in the dangerous position

where nominal GDP growth remains persistently below the 10-year

Treasury yield, meaning debt dynamics would deteriorate because

interest payments would outstrip growth.

Given that the Trump administration's current budget bill is

expected to add nearly $4 trillion to the federal debt over the

next decade, the risk of this is especially pertinent today.

One consequence of higher-for-longer U.S. interest rates

then could be a much-heavier-for-much-longer debt burden.

(The opinions expressed here are those of the author, a

columnist for Reuters)