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U.S. Outlook Revised by Moody’s to Stable on Deficit Reduction

The U.S.’s Aaa credit-rating outlook was revised to stable from negative by Moody’s Investors Service, which said the government’s debt trajectory has steadied with budget deficits narrowing.

Growth in the economy, “while moderate,” is proceeding even as the U.S. has enacted tax increases and spending reductions, the New York-based company said yesterday in a statement. Moody’s assigned the negative outlook in August 2011, warning that it may downgrade the U.S. for the first time on concern fiscal discipline was eroding and the economy was weakening.

The Congressional Budget Office said the federal deficit this fiscal year will be the smallest since 2008, while the economy is forecast to grow next year at the fastest pace since 2006. Deficits are falling after four consecutive years of more than $1 trillion shortfalls resulting from record spending by the administration of President Barack Obama to lift the economy from the worst crisis since the Great Depression.

“It shows positive momentum at a time when we have to get our fiscal house in order,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It doesn’t have a big impact on Treasuries in the short term as the credit-quality story has fallen to the backburner. But longer term it’s good news.”

Treasury Department spokeswoman Brandi Hoffine declined to comment on the revised outlook.

‘Debt Trajectory’

Increased tax revenue and less spending mean America’s budget deficit will probably drop to about 2.1 percent of gross domestic product in 2015, from 4 percent this year and 7 percent in 2012, according to the CBO.

Moody’s has said as recently as May that it was awaiting lawmakers’ budget decisions as it weighed the ranking.

“Though we had been waiting for perhaps more action on the fiscal front, even without that the debt trajectory was supportive of a Aaa rating,” Steven Hess, Moody’s senior vice-president and lead sovereign analyst for the U.S., said in a telephone interview.

Consensus in Washington on spending levels and taxes, especially on big-ticket items such as Social Security, is elusive. Obama sent a $3.8 trillion budget to Congress in April calling for more tax revenue and slower growth in Social Security benefits. The House passed a plan that balances the budget by fiscal 2023 without raising taxes.

S&P Downgrade

“Without further fiscal consolidation efforts, government deficits are anticipated to increase once again over the longer term,” Moody’s said. “If left unaddressed, over time this situation could put the rating again under pressure. Such a conclusion, however, would be unlikely within the horizon referenced by the rating outlook.”

Standard & Poor’s, which downgraded the U.S. one step to AA+ in August 2011, changed its outlook last month to “stable” from “negative.” Fitch Ratings, which has a “negative” outlook on the U.S., said in February that the debt trajectory isn’t consistent with a AAA borrower.

The downgrade by S&P, the world’s largest credit rater, of the U.S. contributed to a global stock-market rout and sent yields (USGG10YR) on Treasury bonds to record lows rather than driving up rates. Yields on 10-year Treasuries dropped 0.74 percentage point in the seven weeks following the downgrade to a then-record 1.67 percent. The yield stood at 2.53 percent yesterday. Moody’s is the second-biggest credit rater.

Rating Changes

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December on Moody’s and Standard & Poor’s grades.

“The rumors of fiscal demise of the U.S. were greatly exaggerated,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “The U.S. fiscal position is getting undeniably stronger. Moody’s is a little late to the party.”

Bond markets shouldn’t be expected to react when a country’s credit rating is changed because the yield of sovereign debt reflects more than just the credit risk on which rankings hinge, according to Fitch. Richard Cantor, Moody’s chief credit officer, said last year that “we have only one objective, which is to assign ratings that are indicative of the relative risk of default and losses.”

To contact the reporter 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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