Central banks’ buying unprecedented amounts of government securities to pump money into their financial systems and keep interest rates low is also driving the divergence between ratings and bond performance, according to Jason Brady, a managing director in Santa Fe, New Mexico, at Thornburg Investment Management, which oversees $83 billion.
The European Central Bank said it will buy bonds of Spain, which is rated one level above non-investment grade, and Italy if requested. The ECB has expanded its balance sheet by about 702 billion euros ($924 billion) since November 2011. Europe’s economy is forecast to shrink 0.14 percent this year and to expand 0.4 percent in 2013, according to Bloomberg surveys.
In the U.S., the Fed will buy $85 billion a month of Treasuries and mortgage bonds starting next month after the Federal Open Market Committee reduced its growth forecast for next year to as little as 2.3 percent from as low as 2.5 percent. The central bank will absorb about 90 percent of net new dollar-denominated fixed-income assets next year, according to JPMorgan Chase & Co.
Even before the latest stimulus efforts, government securities were moving contrary to decisions by Moody’s and S&P. Since the U.S and France were stripped of their top AAA rankings, their bonds surged.
Rates on 10-year French debt fell to 1.98 percent from 2.07 percent on Nov. 19 when it was cut by Moody’s. Yields on similar-maturity Treasuries tumbled to a record low 1.379 percent in July from 2.56 percent on Aug. 5, 2011, just before the U.S. was downgraded by S&P.
After the Treasury Department said S&P made a $2 trillion error in its calculations, the company switched the budget projections it was using and proceeded with the downgrade. S&P denied it made a mistake and said using the government’s preferred fiscal scenario didn’t affect its decision.
While 67 percent of 1,031 global investors in a Bloomberg Global Poll in September 2011 said S&P’s move was justified, Warren Buffett, the world’s second-richest person according to Bloomberg Billionaires Indexes, said the U.S. should be “quadruple-A.” Buffett is Moody’s biggest shareholder.
Rising borrowing has prompted downgrades. European government debt climbed to 90 percent of gross domestic product in the second quarter from 66 percent in December 2007, data from Luxembourg-based Eurostat show. That ratio in the U.S. is expected to increase to more than 70 percent by the end of 2012 from about 36 percent at the end of 2007, according to a Congressional Budget Office forecast.
Moody’s said Sept. 11 it may follow S&P in removing the U.S.’s top rating unless politicians can contain the growing ratio of debt to GDP. Boehner, a Republican from Ohio, said the warning underscores his contention that rising debt is imperiling jobs.