US Sovereign Debt Profile Remains Unsustainable
The United States’ sovereign debt profile is on a precarious path, with deficits expected to widen beyond recent projections by the Congressional Budget Office (CBO). This warning comes from Ryan Kimmel, an analyst at investment firm DoubleLine, who believes the CBO’s forecasts are overly optimistic.
Deficits to Widen Further
Last week, the CBO issued fresh forecasts for the US budget deficits over the next 10 years, showing a slightly improved fiscal picture compared to its previous outlook. However, Kimmel argues that these projections are based on unrealistic assumptions about tax cuts and interest rates. If these assumptions are tweaked even slightly, the debt dynamic deteriorates dramatically.
Tax Cuts and Interest Rates
The CBO’s estimates assume that President Donald Trump’s 2017 tax cuts will expire as planned at the end of this year. However, if Trump 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. Furthermore, the CBO’s projections are based on dovish views on interest rates, which Kimmel believes are unrealistic given the current yield curve.
Interest Rates and Debt Dynamics
The CBO projects that interest rates will remain below 4% from next year until 2035. However, benchmark 10-year yields are currently above 4.6%, and interest rates are in a 4.25%-4.5% range. Kimmel argues that it will be challenging to achieve the CBO’s projected interest rates, especially with a more optimistic growth outlook that should feed through into higher interest rates.
Fiscal Uncertainty
While Trump’s pick for Treasury Secretary Scott Bessent acknowledged that high deficits in recent years were due to a “spending problem,” Kimmel believes there is still little clarity from the Trump administration on the fiscal front. This uncertainty, combined with expectations of a deteriorating fiscal outlook, will likely require the US government to issue more debt.
Rising Treasury Yields
Given these factors, DoubleLine is betting that long-term Treasury yields will continue to rise. Kimmel believes that the debt dynamic is not positive for the long end of the yield curve, and that there is still room for the curve to steepen further. As the US sovereign debt profile remains unsustainable, investors should be prepared for a potentially volatile fiscal future.
Leave a Reply