BlackRock Inc., Loomis Sayles & Co. and Franklin Templeton Investments said the U.S. faces losing its top-level debt rating as officials struggle to raise the $14.3 trillion borrowing limit.
Investors are warning a cut is likely as President Barack Obama and House Speaker John Boehner argue over how to increase the debt ceiling, while also trying to curb borrowing. The government needs to boost the cap by Aug. 2 so it can keep paying its bills, according to the Treasury Department.
“Our guess is, when push comes to shove, the debt ceiling will be raised,” said Bob Doll, chief equity strategist at New York-based BlackRock, which manages $3.66 trillion. “What goes along with that is very difficult to tell, and that’s why the threat of a downgrade still exists,” Doll said in an interview on Bloomberg Television’s “First Up.”
Obama has said the nation’s record borrowings may “do serious damage” to the U.S. economy by diverting tax dollars to interest payments. Yields indicate investors are favoring bank or company debt over Treasurys, raising concern the credibility of government debt is waning.
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Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they may cut the nation’s top-level sovereign ranking if officials fail to resolve the stalemate.
The ratings may be reduced because politicians probably won’t agree on a plan to trim spending, said Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund.
“I’m pretty certain that at least by one agency we’re going to see a downgrade,” Gaffney, who is based in Boston, said in an interview on Bloomberg Television’s “Street Smart.” Treasurys will “continue to be a large, liquid market whether it’s AAA or AA,” she said.
Gaffney’s fund returned 14 percent in the past year, beating 98 percent of its competitors, according to data compiled by Bloomberg.
The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 18.7 basis points yesterday, the least since March.
Debentures from Wal-Mart Stores Inc., the largest retailer, and Paris-based utility EDF SA, both rated in the second-highest AA level, are the best-performing investment-grade corporate securities globally this month through July 25, Bank of America Merrill Lynch indexes show.
An index of corporate debt with the same AAA rating that the U.S. is at risk of losing is outperforming Treasurys by 0.13 percent, the most since March.
“The credibility of Treasury bonds is falling,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. BNP’s U.S. unit is one of the 20 primary dealers that trade directly with the Federal Reserve.
The 10-year Treasury yield was little changed at 2.96 percent as of 8:05 a.m. in London, according to Bloomberg Bond Trader prices. The budget stalemate hasn’t been enough to push the rate to its decade-long average of 4.05 percent.
“Our growing debt could cost us jobs and do serious damage to the economy,” Obama said in a speech July 25. “Interest rates could climb for everyone who borrows money: the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand.”
A House vote on Speaker Boehner’s two-step plan to raise the debt ceiling was postponed, casting doubt on whether lawmakers and Obama can come to an agreement before Aug. 2. Boehner has said Obama is seeking a “blank check.”
Investors may question the creditworthiness of the U.S., Christopher Molumphy, chief investment officer for Franklin Templeton’s fixed-income group, wrote in a report July 25 that his company distributed this week by email.
“Continued doubts about a longer-term solution to the U.S.’s federal deficit may well threaten the country’s AAA credit rating and the status of U.S. Treasuries as assets previously perceived as virtually ‘risk-free,’” according to Molumphy, who is based in San Mateo, California. He helps oversee $734.2 billion at the company.
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