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Deficit-Reduction Plan May Mark Positive Turning Point, Moody’s Hess Says

President Barack Obama’s plan to cut $4 trillion in cumulative deficits within 12 years may be a “positive” for the nation’s credit quality and mark a reversal in the budget debate, according to Moody’s Investors Service.

The U.S. is the only large AAA-rated country that saw its debt rise during the crisis that until recently had no plan that would reverse the trend, said Steven Hess, senior credit officer at Moody’s. Budget cuts would mean the U.S. wouldn’t likely sell as much debt, which has grown to $9.13 trillion in marketable Treasuries from $4.34 billion in mid-2007 as the government boosted spending to pull the economy out of recession.

“It seems both sides of this debate are now targeting lower debt and lower deficits,” said Hess, based on the president’s speech today. “We do see this as a turning point in terms of the debate. We would view that as a positive, but we’ll have to wait to see the outcome.”

In presenting his long-term plan for closing the budget shortfall through a combination of spending cuts and tax increases, Obama set a target of reducing the annual U.S. deficit to 2.5 percent of gross domestic product by 2015, compared with 10.9 percent of GDP projected for this year.

Photographer: Alex Wong/Getty Images

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Photographer: Alex Wong/Getty Images

Representative Paul Ryan proposed turning Medicare into “premium-support” payments for those who enter the program after 2021.

Yields on the benchmark 10-year note fell 4 basis points, or 0.04 percentage point, to 3.46 percent at 4:31 p.m. in New York, according to BGCantor Market Data. Yields dropped nine basis points yesterday, the most since March 16.

‘Unquestionably Positive’

Two-year yields declined 2 basis points to 0.73 percent, the lowest level since March 25.

“The Obama story is unquestionably positive now that the conversation is how much do we cut and where do we cut it rather than whether or not to cut,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “That said, the next two years the market doesn’t expect much progress on that front given the election cycle.”

The administration is aiming to provide a counterpoint to the budget plan released last week by Representative Paul Ryan, which relies on deep cuts in federal spending to trim the deficit.

The Ryan plan to overhaul the federal budget would slash the deficit in coming years by about three-quarters, with a $6 trillion cut in spending and 25 percent cap on tax rates. The Republicans’ first comprehensive budget plan since the November elections would cut the deficit next year to $995 billion from about $1.4 trillion now, though it wouldn’t balance the government’s books until 2040.

Government Shutdown

“We do hope to see the achievement of lower debt and deficits over time,” Hess said in a telephone interview from New York. “How you arrive at deficit reduction is clearly a matter of very contentious debate.”

Congress leaders and Obama agreed late on April 8 to cut about $38 billion from federal spending this year, pulling the government back from the brink of a shutdown. The final compromise slashes about $23 billion less than Republicans had initially sought, yet tens of billions more than Democrats originally said they could accept.

Cindy Stroller and Mimi Barker, spokeswomen in New York for Fitch Ratings and Standard & Poor’s, respectively, said the firms couldn’t immediately comment.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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