The U.S.’s AA+ credit rating was affirmed by Standard & Poor’s, which cited the resiliency and diversity of the economy, almost three years after downgrading the nation for the first time amid political wrangling.
There is a less than one-in-three probability that the ranking will change in the next two years, the New York-based company said in a statement today. The outlook on the rating is stable.
Since the August 2011 downgrade from AAA, 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. Still, S&P said a polarized policy making environment, and high general government debt and budget deficits constrain the ratings.
“The S&P report reflects that the U.S. is on better footing, that the deficit situation has been reduced over the last year and that the amount of the money the Treasury borrows has declined,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Ultimately the fundamental fiscal situation in the U.S. has improved and the credit quality of the U.S. is in very good shape right now.”
The Congressional Budget Office in April projected that the federal deficit will decline to $492 billion this year, the smallest in six years, from $680 billion in 2013 and a record $1.4 trillion when President Barack Obama took office in January 2009.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s Investors Service and S&P suggests they should climb, or they increase even as a change signals a decline, according to data compiled in 2012 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 (USGG10YR) 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, dropping from 2.56 percent on the day of the rating cut. The security yielded 2.59 percent at 2:15 p.m. in New York, according to Bloomberg Bond Trader prices.
“Treasuries continue to trade as the global safe haven asset,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Whether S&P rates them AAA or not appears to be inconsequential.”
The U.S. economy as measured by jobs has improved this year. Payrolls pushed past their U.S. pre-recession peak for the first time in May, a milestone that’s been five years in the making.
The 217,000 advance in hiring followed a 282,000 gain in April, according to Labor Department data released today. It marked the fourth consecutive month employment increased by more than 200,000, the first time that’s happened since early 2000. The jobless rate unexpectedly held at an almost six-year low of 6.3 percent.
In 2011, when 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 ceiling is less of a concern. Congress in February suspended the limit until March 15, 2015. Income tax payments will then postpone the date when the government exhausts its borrowing authority.
“Although the debt burden has stabilized, it will likely rise toward the end of the decade absent medium-term measures to raise additional revenue and/or to cut nondiscretionary expenditure,” S&P said today.
“Credit strengths of the U.S. include its diversified and resilient economy, its extensive economic policy flexibility, and its unique status as the issuer of the world’s leading reserve currency,” the ratings company said in its statement. “However, a polarized policymaking environment and high general government debt and budget deficits constrain the ratings.”
Moody’s and Fitch Ratings each rank the U.S. at the highest credit rating of AAA.
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