The dire economic and political landscape cited by Standard & Poor’s when it downgraded the U.S.’s AAA credit rating in 2011 is proving to be unfounded.
Fitch Ratings increased its outlook on the U.S.’s AAA credit-ranking today to stable from negative, joining Moody’s Investors Service and even S&P in assigning stable outlooks on the world’s largest economy. S&P’s dropping of its rating to AA+ contributed to an equity rout that erased about $6.1 trillion from global stocks.
Since the August 2011 downgrade, record budget deficits have shrunk, economic growth accelerated, the dollar rallied, stocks climbed to all-time highs and Treasuries strengthened their hold as the world’s preferred haven from turmoil. Deficits have fallen from $1 trillion as stronger economic growth is forecast by a government agency to reduce the budget shortfall to a seven-year low as a share of gross domestic product.
“There have been a number of positive credit developments since S&P downgraded the U.S.,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “I’m not sure the ratings companies expected the degree of contraction in the annual deficit that we’ve seen.”
Tax revenue needed to pay the government’s bills is forecast to grow this year more than three times as fast as spending.
The U.S. fiscal 2014 deficit will narrow to $514 billion, or 3 percent of gross domestic product, from $680 billion last year, the Congressional Budget Office said Feb. 4. The projected gap is down from 9.8 percent of GDP in 2009, the widest in records dating back to 1974, and is close to the average of the past four decades, the agency said.
While the CBO report showed a short-term improvement, it also sees deficits swelling again over the next decade as a result of rising health-care costs and interest payments on government debt.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.
Treasuries due in 10 years rallied in August 2011, as yields dropped 57 basis points, the biggest monthly reduction in borrowing costs since December 2008. Yields on that maturity touched a record low 1.379 percent in July 2012. The security yielded 2.77 percent at 12:24 p.m. in New York, according to Bloomberg Bond Trader prices.
When New York-based S&P stripped America of its top grade, it cited political wrangling about the debt limit and the lack of a plan to reduce deficits.
The government in 2013 endured its first partial shutdown in 17 years after Congress failed to break a partisan deadlock on the budget. In 2011, politicians refused to raise the borrowing threshold until they reached the Treasury’s deadline for avoiding a default.
For now, the debt limit is less of a concern. Congress in February suspended the debt limit until March 15, 2015. Income tax payments will then postpone the date when the government exhausts its borrowing authority.
S&P was in contact with the Treasury’s Matthew Rutherford, now the Treasury’s assistant secretary for financial markets, at least as early as March 2011 as part of its review that culminated with its first ever U.S. downgrade, according to e-mails obtained though a Freedom of Information Act request by Bloomberg News. Analysts at Fitch and Moody’s also contacted the Treasury that summer, the e-mails show.
Sixty-seven percent of 1,031 global investors in a Bloomberg Global Poll in September 2011 said S&P’s move was justified.
S&P signaled confidence in its reduced U.S. rating last year. John Chambers, managing director of sovereign ratings at the company, told Bloomberg Television on March 1, 2013, that “they’ll catch up to us,” referring to other credit-rating companies.
Moody’s now gives the nation its top Aaa grade and reversed its negative outlook, which had been the view since August 2011, to stable in July. The Fitch outlook change comes after Congress suspended the nation’s debt limit for more than a year, reducing the risk of a default, and as federal deficits decline.
“While the mood in Washington is anything but collegial,” there have been some signs of increased cooperation, Tony Crescenzi, executive vice president at Newport Beach, California-based Pacific Investment Management Co., said in an e-mail before the outlook change, citing lawmakers’ agreement on budget outlays in 2014.
Fitch had warned since October that political disputes linked to the borrowing limit might spur a downgrade from AAA when it placed the country on Rating Watch Negative. The U.S. was assigned a negative outlook by Fitch in November 2011.
“The federal debt limit was suspended in mid-February in a timely manner and in a way that avoided casting uncertainty over the full faith and credit of the U.S., in contrast to the crises in August 2011 and October 2013,” Fitch said in a statement.
The jointly owned subsidiary of Paris-based Fimalac SA and New York-based Hearst Corp., Fitch is registered with the European Securities and Markets Authority, a regulator that oversees the industry. Fitch agreed to disclose a statement about the U.S. rating on March 21 as part of European rules.
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