U.S. downgrade seen as upgrade as $4 trillion debt dissolved

U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.

Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private-sector borrowing is down by $4 trillion to $40.2 trillion.

Reduced borrowing means there is less competition for the U.S. Treasury Department as it sells debt to fund spending programs to help the nation recover from the worst financial crisis since the Great Depression. Credit-rating firms are discounting the improvement even as debt, equity and currency markets suggest the U.S. is more creditworthy than before Standard & Poor’s stripped the nation of its AAA grade in 2011.

“Most people don’t pay much attention to ratings when it comes to Treasuries, as they are still considered to be risk-free assets,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said Oct. 5 in a telephone interview. “Until that perception changes Treasuries will continue to be” in demand, he said.

Record Bids

The U.S. government, which is scheduled to sell $66 billion of three-, 10- and 30-year bonds this week in three auctions starting today, has attracted a record $3.16 in bids for each dollar of the $1.59 trillion of securities it has sold in 2012, according to data compiled by Bloomberg. That exceeds the previous high of $3.04 set last year. The U.S. sale of $32 billion in three-year notes today was met with record demand.

Deleveraging in the private sector may allow households to boost spending, which accounts for about 70 percent of the economy, and increase their capacity to pay taxes. Household wealth in the U.S. rose to $62.7 trillion as of June 30 from $51.2 trillion in early 2009, the Federal Reserve said Sept. 20.

Rising wealth would bolster the ability of the government to service its debt, even after the amount of Treasury securities outstanding soared to a record 71 percent of GDP from 36 percent five years ago.

Yields on 10-year Treasuries rose 11 basis points last week, or 0.11 percentage point, to 1.74 percent, according to Bloomberg Bond Trader data. The price of the benchmark 1.625 percent note due August 2022 fell 31/32, or $9.69 per $1,000 face amount, to 98 30/32. The yield was 1.71 percent at 8:49 a.m. in New York.

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