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Markets Embrace Supercommittee Failure, Prudential’s Krosby Says

Congress’s failure to agree on $1.5 trillion of deficit reductions in November was met with relief among investors because the economy got more time to heal, according to Prudential Financial Inc.’s Quincy Krosby.

“The markets are truly relieved that we’re not getting the cuts and the commensurate pullback of economic growth that would have come from the committee doing its job,” Krosby, chief market strategist at Prudential Annuities, said yesterday at a conference in New York. “It’s buying time for growth.”

The Standard & Poor’s 500 Index has increased 7.1 percent since the so-called supercommittee said Nov. 21 that it was unable to reach an agreement on deficit cuts. Corporate bonds have gained 1 percent, according to Bank of America Merrill Lynch index data.

While the panel’s collapse is set to trigger $1.2 trillion of automatic cuts, the failure to compromise on deeper reductions avoids removing government support for the economy prematurely, according to Krosby, who joined Prudential in 2009 after working at The Hartford Financial Services Group Inc. and representing the U.S. to the International Monetary Fund.

“We will have to pay at some point, but hopefully when we do pay, the underlying growth is stronger,” she said. “We’re buying time. Buying time is actually good.”

Treasuries have returned 0.2 percent since the congressional committee’s negotiations ended in a stalemate and returned 9.8 percent last year, the biggest gain since 2008, according to Bank of America Merrill Lynch index data.

Bond Market ‘Fine’

“Despite all this, the fixed-income market, the Treasury market, appears to be fine,” said Krosby.

The lack of an agreement by the committee, created in August under the Budget Control Act that raised the nation’s borrowing limit, means across-the-board spending cuts to domestic and defense programs are set to take effect starting in January 2013.

Both major political parties blamed each other for the stalemate, with Democrats saying Republicans wouldn’t relent on taxes and Republicans accusing Democrats of rejecting an offer to raise revenue along with spending cuts.

S&P cut the U.S. credit rating to AA+ on Aug. 5, citing political wrangling that failed to put the nation’s finances on a sustainable path. While Fitch Ratings and Moody’s Investors Service have maintained their top rankings, they have lowered their outlooks on the debt to negative.

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