Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said.
“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.
The warning from Moody’s came as Standard & Poor’s lowered Japan to AA-minus from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.
U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.
‘Trajectory Is Worse’
“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.
Moody’s said it expects there will be “constructive efforts” to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level.
Yields on the benchmark securities were little changed at 3.39 percent today as of 6:26 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 22/32. Demand for U.S. debt has pushed the rate down from 5.27 percent a decade ago.
The U.S. Dollar Index, which tracks the currency against six counterparts, climbed to 77.791 today from a low during the global financial crisis of 70.698 on March 17, 2008, as the U.S. economy recovered.
‘Remote’ Downgrade Odds
The odds of a U.S. ratings cut are remote, said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $42.2 billion in assets and is part of Japan’s second-largest publicly traded bank.
“I don’t think the U.S. will be downgraded,” Nakamura said. “The U.S. may try to cut spending. Those kinds of policies will support the rating.” Mizuho Asset bought Treasuries in December, he said.
President Barack Obama’s deal with congressional Republications, announced Dec. 6, calls for a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax for $120 billion for a year.
The U.S. has the highest government debt-to-government revenue of any Aaa rated country, Moody’s said. The ratio, at 426 percent, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark, according to Moody’s.
‘Trend May Continue’
“Other large Aaa countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue,” Hess said.
S&P cut Japan’s credit rating for the first time in nine years, saying the government lacks a “coherent strategy” to address the nation’s 943 trillion yen ($11 trillion) debt burden.
The ratings firms also have downgraded Europe’s so-called peripheral countries on rising deficits and slumping growth.
Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to below investment grade. Moody’s began reviewing Portugal and Spain in December.
Credit-default swaps on U.S. Treasurys climbed for a fourth day yesterday, rising 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it would cost the equivalent of $51,570 a year to protect $10 million of debt against default for five years.
Prices of the swaps compare with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 for Greek bonds.
Reduce Fed Borrowing
The U.S. Treasury Department said it will reduce its borrowing on behalf of the Federal Reserve to $5 billion from $200 billion because of concerns about the federal debt limit. The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.
Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the U.S. debt limit.
Treasurys are poised to fall as the debate on increasing the U.S. debt limit intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. was quoted by the Associated Press as saying.
U.S. debt “will sell off as this get more press and with more invective,” Gross said, according to AP. “Investors like us, we sell now.” Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
© Copyright 2014 Bloomberg News. All rights reserved.