U.S. Treasuries Flirting With Another Downgrade

So far, the financial markets have utterly ignored the major credit rating agencies’ growing impatience with U.S. fiscal health. Sooner or later, though, the perception gap between the markets and the credit rating agencies may narrow.

Late this summer, when S&P became the first major credit rating agency to drop the U.S.’s AAA rating, investors including Warren Buffett dismissed the move as way off base. Treasury prices have increased 3.8 percent since then, according to Bank of America Merrill Lynch, outperforming pretty much all other asset classes. Late Monday, Fitch announced that it had put U.S. Treasuries on negative watch, with a 50 percent chance of a downgrade over the next two years. Following the news, the yield on 10-year U.S. Treasury notes rose to 2.04 percent from 1.98 percent on Monday.

The Fitch announcement was a reaction to the the Congressional “super committee’ failure to reach an accord on budget cuts. S&P and Moody’s didn’t change their outlook, because the failure of the committee is supposed to trigger $1.2 trillion in spending cuts, including deep reductions in the Defense budget. But Fitch said the negative outlook “reflects Fitch’s declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path ... will be forthcoming.”

Why are such measures necessary? As Fitch noted, the $1.2 trillion in automatic cuts are based on discretionary spending, and that further cuts “will not be credible” if they do not include cuts to entitlement programs. Meanwhile, Fitch expects Federal debt to reach 90 percent of GDP and consume more than 20 percent of tax revenues by the end of the decade. If state and local debt is included in the total, then debt will reach 110 percent of GDP over the same period of time. Economist Kenneth Roggoff says a debt level of more than 90 percent of GDP has proven unsustainable.

所以，美国不是西班牙或意大利。但如果它没有召唤政治意愿，在十年结束时解决其财政挑战，可能是。和惠誉并不期望美国，直到2013年开始努力，在2012年的总统选举后面。而惠誉持怀疑态度，即美国有削减权利计划的政治能力，这将作为对财政整合途径的必要步骤。

While rating agencies take the long term view of the U.S. fiscal situation, markets are comforted by a short-term view. The dollar and the Treasury market have been been bolstered since the onset of the financial crisis by the avoidance of risk and the dire economic problems in Europe. The the euro is under siege, and interbank and sovereign debt markets are all but shut down. That has bolstered demand for U.S. Treasuries.

但是，市场可能会赶上评级机构的风险。一方面，他们的宪章需​​要一些机构投资者亚博赞助欧冠只持有AAA额定债务。如果美国债务的平均评分低于AAA，则至少在理论上迫使其中一些机构销售美国债务。即使这些机构找到了这些要求的方式，仍有大量潜在的催化剂，以向下举行国债。

If the crisis in Europe is ever brought under control, demand for euros or successor currencies could rise, removing one of the supports for the dollar. And as the U.S. debt approaches the critical 90 percent level, investors are likely to take the problems with U.S. fiscal policy more seriously than they now do.

It’s still quite possible that the U.S. Treasury market will stay strong well into the next decade and beyond. As Fitch notes, the U.S. economy has underlying strength and the dollar remains the world’s safe haven and reserve currency. The U.S. may continue to inch toward fiscal stability, and even that slow progress might be enough to maintain investor confidence in Treasuries. But it is dangerous to assume that things will just work out.

And as the recent experience in Europe shows, if and when the market does turn, the change in sentiment could be sudden and violent.