U.S. Sovereign Debt Profile

By Davide Barbuscia

NEW YORK (Reuters) – The U.S. sovereign debt profile remains on an unsustainable path, with deficits likely to widen more than recently projected by the Congressional Budget Office (CBO), an analyst at investment firm DoubleLine stated on Tuesday.

The CBO, a non-partisan budget agency, recently issued updated forecasts for U.S. budget deficits over the next decade, showing a slightly improved fiscal outlook compared to its June 2024 report.

The debt-to-gross domestic product (GDP) ratio, a key indicator of fiscal health, is now estimated to grow to 118.5% by 2035, up from about 98% last year. This is an improvement over last year’s forecast of 122% by 2034.

However, analyst Ryan Kimmel from DoubleLine characterized these projections as “very optimistic,” particularly in light of expected tax cuts from President Donald Trump. He emphasized that the estimates assume interest rates will remain low, which may not hold true.

“If you tweak those rate assumptions by very small amounts, the debt dynamic deteriorates quite dramatically … the unsustainable debt dynamics still remain in place,” Kimmel remarked in an interview.

The CBO’s estimates are predicated on existing laws and assume Trump’s tax cuts from 2017 will expire as scheduled at the end of this year. If Trump and Congressional Republicans extend current individual and small business tax rates, estimated deficits could surpass $4 trillion over the next decade, as the CBO has indicated.

The CBO anticipates that the effective federal funds rate, along with yields on three-month Treasury bills and 10-year Treasury notes, will stay below 4% from next year until 2035. Kimmel pointed out that achieving this could be challenging since current yields are above 4%, with benchmark 10-year yields around 4.6%.

Recently, Trump’s Treasury Secretary pick Scott Bessent acknowledged high deficits are due to a “spending problem,” which Kimmel viewed as a positive sign. However, clarity on fiscal policy from the Trump administration is still lacking.

Given the anticipated decline in fiscal outlook necessitating increased government debt issuance, DoubleLine expects long-term Treasury yields to rise. Kimmel stated, “We don’t think that the debt dynamic is positive for the long end of the yield curve … and we see potential for further steepening of the curve.”