U.S. Downgrade Threat ‘Nonsense,’ OppenheimerFunds’s Willis Says

Bond investors would ignore a downgrade of the U.S. credit rating if lawmakers fail to reach a budget agreement that avoids the fiscal cliff, according to panelists at a money manager conference.

“It would not be a problem if the U.S. received a downgrade,” said Mike Materasso, co-chairman of the fixed- income policy committee at Franklin Templeton Investments in New York, at the Bloomberg Portfolio Manager Conference in New York. “The U.S. is experiencing problems many other developed countries are facing.”

Congress and President Barack Obama must confront more than $600 billion in tax increases and spending cuts set to take effect in 2013 or risk the economy tipping back into recession. Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political wrangling that pushed the nation to the deadline an agreement to lift the debt ceiling.

Fitch Ratings warned yesterday that the U.S. may be downgraded next year unless lawmakers avoid the fiscal cliff and raise the debt ceiling in a timely manner, while Moody’s Investors Service said it will wait to see the economic impact should the nation experience a fiscal shock.

“It’s nonsense,” said Troy Willis, vice president at senior portfolio manager at OppenheimerFunds Inc. “Tell me what’s a better credit out there.”

Bond Rally

Since Treasuries were downgraded in 2011, the securities have returned 6.7 percent as of Nov. 7. Even with the downgrade and a jump in marketable Treasuries outstanding since 2007 to $10.9 trillion as of Oct. 31 from $4.5 trillion, 10-year yields are down from 2.56 percent when S&P cut the U.S. one step to AA+. The yield touched a record low 1.379 percent on July 25.

“You can be downgraded and your yields can rally,” said Eric Stein, a Boston-based portfolio manager at Eaton Vance Management, which oversees $198 billion. “It’s the benefit of having a reserve currency.”

Yields dropped the most in five months yesterday as Obama’s re-election bolstered bets the Federal Reserve will keep supporting the economy and the fiscal cliff looms.

“There’s a low probability that we’ll have this fiscal cliff,” Willis of OppenheimerFunds said. Raising taxes and cutting spending would be “good for bonds,” he added.

All three panelists agreed that if Fed Chairman Ben S. Bernanke stepped down from his position in 2014, Janet L. Yellen, Fed vice chairman, would replace him.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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