Standard & Poor’s said that it was an “oversimplification” to blame its stripping the U.S. of the top AAA sovereign rating for market volatility, and that many observers agreed with the step.
Markets were also responding to a weaker global growth outlook, David Beers, global head of sovereign and international public finance ratings at S&P, told reporters in Singapore today. The company is untroubled by dissenting views on its decision, he said in response to questions.
Instead of falling in value after S&P said the U.S. was less creditworthy, Treasuries rallied and the government’s borrowing costs fell to record lows. While stocks fell, wiping $2.5 trillion from the market value of global equities on the first trading day after S&P on Aug. 5 cut the U.S. by one level to AA+, the gain in benchmark 10-year government notes sent yields down almost a quarter percentage point, to 2.32 percent.
Treasuries have outperformed since the announcement, earning investors 1.62 percent, including reinvested interest, according to Bank of America Merrill Lynch’s U.S. Treasury Master index. By comparison, the company’s Global Sovereign Broad Market Plus Index shows a 1.31 percent return.
Beers’s comments follow criticism including that from Warren Buffett, the world’s most successful investor, who said the U.S. should be “quadruple-A” and the decision doesn’t reflect any inability of the U.S. to pay its debts.
“It’s at the very least an oversimplification to say that all this is happening because of S&P’s change of opinion,” Beers said. Amid evidence of a slowing world economy, “markets digesting all these news have concluded that the near-, perhaps medium-term, outlook for global growth has become less certain. This was all happening before the downgrade and has continued after some of the noise around the downgrade,” Beers said.
The Obama administration blasted S&P, with the Treasury Department telling the company it had overestimated future national debt by $2 trillion. S&P said the discrepancy didn’t affect its decision, and based its conclusion on the U.S. government becoming “less stable, less effective and less predictable.”
The U.S. growth trajectory faces downside risks, and the medium-term fiscal adjustment in the world’s biggest economy may be impacted by a slowdown, Beers said today. An AAA rating for the U.S. isn’t likely in the near term, he said.
S&P kept the outlook on the U.S. debt rating at “negative” on Aug. 5. The ranking may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said.
U.S. lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S.
The new rating from S&P, which cited “uncertainty” in the policymaking process, is the second-highest and puts the U.S. on the same level as Belgium and New Zealand, above Japan and China.
The Treasury sold $35 billion of two-year notes on Aug. 23 at a record low yield of 0.22 percent as investors continued to seek the world’s safest securities as refuge from financial market turmoil and a slowing economy. It was the first of that maturity to be sold after the downgrade. Ten-year Treasury yields averaged 3.15 percent this year, against about 4 percent the past decade.
The S&P decision to cut the U.S. rating was a “blow to confidence” because it raised questions about the core of the financial system, Mohamed A. El-Erian, Pacific Investment Management Co.’s chief executive and co-chief investment officer, said in an Aug. 8 radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
“We think there is increasing evidence in the U.S. that the downside risks exist” for the economy, Beers said today. “If interest rates remain low, as the Fed seems to be signaling right now, what they’re suggesting is the path of growth may be more sluggish than they previously assumed which also will potentially push up the debt trajectory even if for a period it manages to keep interest rates low.”
The underlying trend of demand in Japan remains quite weak, and S&P is still waiting for the country’s fiscal consolidation plan, he said.
Asian economies are still fighting inflationary pressures and the region’s ratings face downside risks from the U.S. and Europe, S&P said.