By Tracy Withers
source : bloomberg.com
The sovereign credit rating of the U.S. will be cut as “fiscal theater”
plays out in the world’s biggest economy, according to Pacific
Investment Management Co., which runs the world’s largest bond fund.
“The U.S. will get downgraded, it’s a question of when,”
Scott Mather, Pimco’s head of global
portfolio management, said today in Wellington. “It depends on what the end of the year looks like, but it could be fairly soon after that.”
The
Congressional Budget Office has warned the
U.S. economy
will fall into recession if $600 billion of government spending cuts
and tax increases take place at the start of 2013. Financial markets are
complacent about whether the White House and Congress will reach
agreement on deferring the so-called fiscal drag on the economy until
later next year, Mather said.
In a “base case” of President
Barack Obama
being re- elected and Congress becoming more Republican, there is a
high likelihood an agreement “doesn’t happen in a nice way, and we have
disruption in the marketplace,” he said.
Policy makers probably
will agree on cutbacks that would lower economic growth by about 1.5
percentage points next year, Mather said. They may roil markets by
discussing scenarios that would lead to a 4.5 percentage-point fiscal
drag, he said.
‘Budgetary Meth’
Bill Gross,
manager of Pimco’s $278 billion Total Return Fund, this month said that
the U.S. will no longer be the first destination of global capital in
search of safe returns unless fiscal spending and debt growth slows,
saying the nation “frequently pleasures itself with budgetary crystal
meth.” He reduced his holdings of Treasuries for a third consecutive
month to the lowest level since last October.
S&P last week cut
Spain’s debt rating to BBB-, the lowest investment grade, and placed it on negative outlook.
“Almost
all sovereigns with poor debt dynamics are going to get downgraded,
we’re just talking about the pace,” Mather said. Credit rating companies
“have been slow in downgrading some sovereigns, but we think the pace
probably picks up in the year ahead.”
Bond investors needn’t
worry that a rating cut will hurt returns. About half the time,
government bond yields move in the opposite direction suggested by new
ratings, according to data compiled by Bloomberg on 314 upgrades,
downgrades and outlook changes going back to 1974.