Wednesday 23 August 2017

World's biggest bond investors say US will lose it AAA rating

Thomas Molloy

Thomas Molloy

SOME of the world's biggest bond investors warned yesterday the US will lose its triple AAA rating as congress failed to reach agreement on measures to prevent a crippling US default.

Stock markets tanked as the solution remained elusive, the Federal Reserve said the rate of economic growth was slowing and EU leaders bickered about the details of last week's solution to the euro's problems.

Even if a deal is reached to raise the $14.3trillion US debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of America's top-notch credit rating, which could sow financial chaos worldwide.

Bond investors including BlackRock, Franklin Templeton Investments and PIMCO all warned the US faced losing its top-level debt rating. The comments suggest the world's biggest bond managers are now resigned to the fact that the rating will be cut.

Jitters

While stock markets showed jitters following sharp losses in the US equity markets and commodities such as crude oil, the market for US bonds was stable, with the 10-year treasury yield rising just five basis points in afternoon trading -- still below the decade-long average of 4.05pc.

Republicans and Democrats feverishly tried to rework rival deficit reduction plans yesterday -- but experts said the fate of both proposals remained heavily in doubt.

Adding to the gloom was a report from the Fed which said the US economy grew at a slower pace in more parts of the country since the start of June as shoppers stopped spending and factory production eased.

"Economic activity continued to grow," the Fed said in its Beige Book survey which is released several times a year and influences rate-cutting decisions. "However, the pace has moderated in many districts." Growth slowed in eight of the Fed's 12 regions, compared with four in the last survey.

The Commerce Department said in a separate report that orders placed with US factories for durable goods unexpectedly fell 2.1pc in June.

That suggests companies were losing confidence in the recovery as the second quarter ended.

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