Edinburgh’s two biggest fund companies have a warning to investors: don’t overlook the U.S. when scouring the world for nations with too much debt.
Standard Life Investments is questioning when President Barack Obama’s administration can reduce borrowings, said Andrew Milligan, the company’s head of global strategy. Scottish Widows Investment Partnership sold U.S. stocks in March on concern an eventual reduction in spending would weigh on economic growth. The amount of total marketable U.S. debt outstanding has risen to $7.96 trillion from $4.4 trillion in mid-2007.
“I don’t know how long the U.S. can afford not to focus on the issue and take action,” Ken Adams, the top strategist at Scottish Widows, said in an interview. “It’s like Greece. It’s very hard to pick the point at which confidence suddenly goes.”
The companies, which together oversee about 300 billion pounds ($436 billion), are trying to fathom where risks could next unnerve markets in what Milligan called the “aftershocks” of the financial crisis.
The euro lost 17 percent against the dollar this year amid speculation a possible default in Greece might trigger debt crises in other parts of Europe, such as in Spain and Portugal.
A Hungarian government spokesman last week warned his country was in a “very grave situation,” roiling markets and sending the euro to a four-year low before officials in Budapest came out and reversed the comments.
Credit default swap rates, a gauge of how investors view debt risks, may be “under-estimating” potential fiscal problems in the U.S., according to Adams.
The U.S. budget deficit stood at 9.3 percent of gross domestic product at the end of March, compared with 3.3 percent for Germany, an average of 6.3 percent for the euro area and 7.4 percent for Japan, data compiled by Bloomberg show.
Default swaps protecting against losses on U.S. government debt for 10 years cost 48.5 basis points, less than half that of Japan and France and lower than Germany, according to prices from CMA DataVision.
“Yes, the U.S. has the benefit of the dollar, and yes, the U.S. is a slightly faster-growing economy, but does this mean it can escape the debt trap which so many people are talking about in Japan and Europe?” Milligan said at his office in the Scottish capital. “The arithmetic is really very similar.”
GDP in the U.S. grew an annual 2.5 percent in the first quarter versus 0.6 percent for the 16 nations sharing the euro.
‘Least Dirty Shirt’
Bill Gross, manager of the world’s biggest bond fund and co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., called the U.S. the world’s “least dirty shirt” in a June 4 Bloomberg Radio interview.
Obama is starting to scale back borrowing. The government is selling $70 billion of notes and bonds this week, down from $78 billion at the last sale of similar securities. The drop in the total amount is the most since credit markets collapsed.
The debt crisis and the lowest inflation rate in four decades in the U.S. has driven investors to buy government bonds, making them expensive compared with other investments, Milligan and Adams said.
The 10-year yield was one basis point higher at 3.2 percent as of 9 a.m. in London, down from this year’s high of 4.01 percent reached on April 5.
U.S. Treasuries have returned 4.7 percent this year, compared with 7.3 percent for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The Standard & Poor’s 500 Index has lost investors 3.9 percent, while the Stoxx Europe 600 Index posted a negative return of 3.1 percent, or 19 percent in dollar terms.
Scottish Widows cut its holding of U.S. stocks to “neutral” from “overweight,” meaning it holds an amount equivalent to the proportion of the securities in the indexes where it measures its performance. The money went into cash and was then reinvested in U.K. stocks in the final week of May, Adams said. He didn’t give details on his bond holdings.