U.S. May Lose AAA Rating Even With a Debt Deal, BlackRock, Templeton Say
BlackRock Inc., Franklin Templeton Investments, Loomis Sayles & Co., Pacific Investment Management Co. and Western Asset Management said the U.S. faces losing its top-level debt rating as officials struggle to raise the $14.3 trillion borrowing limit and reduce spending.
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.
The comments suggest that the world’s biggest bond managers are resigned to the fact that the U.S. rating will be cut. Standard & Poor’s, which has rated the U.S. AAA since 1941, said July 14 that the chance of a downgrade is 50 percent in the next three months and it may cut the nation as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit.
“Addressing the debt ceiling is of course very important, but addressing it alone doesn’t avert a downgrade,” Barbara Novick, a co-founder and vice chairman at BlackRock, the world’s biggest money manager with $3.66 trillion in assets, said in an interview. “Without a credible plan to cut the deficit, that’s a real issue.”
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 Treasuries, raising concern the credibility of government debt is waning.
‘Massive Consequences’
Moody’s Investors Service and Fitch Ratings have also said they may cut the nation’s top-level sovereign ranking if officials fail to resolve the stalemate.
“If the U.S. defaults, there would be massive consequences,” Pacific Investment Management Co.’s Mohamed El- Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “People are concerned, but they sort of think it’s a very, very low probability, and we would agree.”
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.
‘Certain’ Downgrade
“I’m pretty certain that at least by one agency we’re going to see a downgrade,” Gaffney, who is based in Boston, said yesterday in an interview on Bloomberg Television’s “Street Smart.” Treasuries 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. (WMT), the largest retailer, and Paris-based utility EDF SA (EDF), 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 Treasuries by 0.13 percent, the most since March.
Yield Rise
“The longer-term implications are that a downgrade could be bad for our currency and this could raise our borrowing Costs,” Stephen Walsh, the chief investment officer of Western Asset Management, the Pasadena, California-based fixed-income unit of Legg Mason Inc., said in an interview. Walsh oversees about $365 billion in bond assets.
The 10-year Treasury yield rose five basis points to 3 percent as of 1:17 p.m. in New York, 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 yesterday, 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 today by e-mail.
“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.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
U.S. President Barack Obama
Olivier Douliery/Pool via Bloomberg U.S.
Obama has said the nation’s record borrowings may “do serious damage” to the U.S. economy
Obama has said the nation’s record borrowings may “do serious damage” to the U.S. economy Photographer: Olivier Douliery/Pool via Bloomberg U.S.
July 27 (Bloomberg) -- Bob Doll, chief equity strategist at BlackRock Inc., talks about the impact of a political impasse over the U.S. debt ceiling on financial markets and his investment strategy. Doll speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
July 27 (Bloomberg) -- Bill Blain, co-head of the Special Situations Group at Newedge Group, talks about the U.S. debt-ceiling debate and the prospect of a ratings downgrade. He speaks with Francine Lacqua on Bloomberg Television's "Last Word." (Source: Bloomberg)
July 27 (Bloomberg) -- David Greenlaw, chief fixed-income economist at Morgan Stanley, discusses the prospects of a U.S. credit downgrade by Standard & Poors and the outlook for the bipartisan debt-ceiling negotiations in Washington. S&P, Moody’s Investors Service and Fitch Ratings have said they may cut the nation’s top-level sovereign ranking if officials fail to resolve the stalemate. Greenlaw speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)
July 27 (Bloomberg) -- Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office, discusses Senate Majority Leader Harry Reid and House Speaker John Boehner's respective plans for raising the U.S. debt ceiling. Holtz-Eakin talks with Matt Miller and Deirdre Bolton on Bloomberg Television's "InsideTrack." David Resler, chief economist at Nomura Securities International Inc., also speaks. (Source: Bloomberg)
July 27 (Bloomberg) -- John Ryding, chief economist at RDQ Economics LLC, talks about continued negotiations on raising the U.S. debt ceiling and reducing the federal deficit. Ryding speaks with Deirdre Bolton and Matt Miller on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 27 (Bloomberg) -- Michael Pond, co-head of interest-rate strategy at Barclays Capital, talks about impact of the U.S. debt debate and possible default on the Treasury market. Pond speaks with Matt Miller and Sara Eisen on Bloomberg Television's "InsideTrack." John Ryding, chief economist at RDQ Economics LLC, also speaks. (Source: Bloomberg)
July 27 (Bloomberg) -- Kenneth Polcari, a managing director at ICAP Plc, discusses the outlook for the U.S.'s top-level AAA credit rating. He spoke yesterday with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
July 26 (Bloomberg) -- Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund, talks about the bond market and the effects of a possible U.S. credit rating downgrade. Gaffney speaks with Carol Massar, Matt Miller and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)
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