The U.S. is cruising toward another humiliating sovereign debt credit rating, according to Pacific Investment Management’s head of global portfolio management Scott Mather. Pimco is the world’s biggest bond fund.
Mather was referring to the rough negotiations ahead after the presidential election, over $600 billion of government spending cuts and tax increases that will take hold in early 2013 without a new debt deal. “The U.S. will get downgraded, it’s a question of when,” Mather said. In his base case, President Obama gets a second term and Congress becomes more Republican.
Yet here’s the thing: Will the markets really care?
Flash back to the summer of 2011, when Standard & Poor’s lowered the U.S. once-sterling AAA rating. Impact? Not much. The yields on 10-year Treasury bonds are actually lower than August of 2011. China and Japan kept buying Treasuries and the country continued to attract foreign direct investment into the stock market and corporate assets. The greenback remains the world’s reserve currency.
Moody’s Investors Service announced in September that it would probably cut its AAA rating on US debt if Congress and the next president don’t come up with a credible debt reduction plan to avoid the dreaded “fiscal cliff” early in 2013. Will the market reaction be any more animated? We will see, but probably not.
Make no mistake: America has some serious fiscal challenges that eventually will bring the country to ruin if left unaddressed. But right now, the U.S. economy still looks like a better bet for global investors then Europe and Japan. And that realization will probably trump any future credit rating haircut.
