Moody’s Investors Service said it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless Congress next year reduces the percentage of debt- to-gross-domestic-product during budget negotiations.
The U.S. economy will probably tip into recession next year if lawmakers and President Barack Obama can’t break an impasse over the federal budget and if George W. Bush-era tax cuts expire in what’s become known as the “fiscal cliff,” according to a report by the nonpartisan Congressional Budget Office published on Aug. 22. The rating would likely be cut to Aa1 from Aaa if an agreement on the debt ratio isn’t reached, Moody’s said in a statement today.
Moody’s put the rating under review with a negative outlook in August 2011, when the U.S. pushed back a decision on spending and raised its so-called the debt ceiling after months of political wrangling. S&P cut its rating to AA+ that month, blaming the nation’s political process. Treasuries rallied as investors ignored the reduction, with the yield on the benchmark 10-year note since declining to record lows and drawing the ire of investors such as Warren Buffett, the biggest shareholder of Moody’s, who said after the S&P decision that the U.S. should be “quadruple-A.”
“At some point, we might see the market demand a higher yield premium to own Treasuries, but I don’t think that’s the case now as this is just a shot across the bow,” said Jack McIntyre, a money manager in Philadelphia at Brandywine Global Investment, which oversees $30 billion of debt. “It’s hard to find a bond market that has the depth of liquidity that Treasuries do.”
McIntyre said his firm has reduced its Treasury holdings to lock in recent gains. U.S. government debt has returned 6.4 percent since the S&P downgrade and gained 9.8 percent in 2011, the most since 2008, according to Bank of America Merrill Lynch index data.
Hours after the Moody’s statement, the U.S.’s $32 billion of three-year notes auction drew record demand.
The offering’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.94, the highest on record, versus an average of 3.51 for the past 10 sales. The yield was 0.337 percent, approaching the record low sale yield of 0.334 percent set in September 2011.
“People are not worried about or focused on the Moody’s report,” said David Brown, a money manager who helps oversee $89 billion of fixed-income assets at Neuberger Berman in Chicago, said in a telephone interview. “The U.S. has time and the means to deal with it.”