U.S. outlook revised to stable by S&P as fiscal risks recede

The U.S.’s AA+ credit rating outlook was increased to stable from negative by Standard & Poor’s, based on receding fiscal risks, less than two years after stripping the world’s largest economy of its top ranking.

The U.S. has a less than one-in-three likelihood of a downgrade in the “near term” with the revision, S&P said today in a statement. The New York-based company said it sees “tentative improvements,” such as the deal politicians reached to resolve what became known as the fiscal cliff and through spending cuts in the Budget Control Act of 2011.

U.S. government debt as a percentage of gross-domestic- product will likely be stable at about 84% for the next few years, S&P said. This may “allow policy makers some additional time to take steps to address pent-up age-related spending pressures.” S&P, the world’s largest credit rater, cut the U.S. ranking from AAA in August 2011, contributing to a global stock-market rout and sending yields on Treasury debt to record lows as investors sought a refuge in the world’s most easily traded securities.

Downgrades don’t necessarily correspond to higher borrowing costs. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53% of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg on Moody’s and S&P grades.

Improving Economy

“The improving U.S. economy is boosting government revenues, the sequester has trimmed spending, and uncertainties about growth in China and Europe make the United States the preferred destination for global investors,” said Phillip Swagel, former Treasury assistant secretary for economic policy under the George W. Bush administration and now a professor at the University of Maryland.

Yields on benchmark 10-year Treasuries dropped 0.74 percentage point in the seven weeks following the August 2011 downgrade to a then-record 1.67%.

The U.S. downgrade by S&P in 2011 reflected in part the political impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load and weakening “effectiveness, stability, and predictability of American policy making and political institutions.”

Treasuries Declined

Treasuries declined after the ratings outlook change today. Yields on 10-year notes rose as much as five basis points, or 0.05 percentage point, to 2.22% in New York.

Traders speculated that a stronger U.S. fiscal position raises the likelihood that the Federal Reserve will decrease stimulus through its bond-buying program.

“More positive news on the economy will be something that guys will say helps the Fed out with the case to start pulling back,” said Sean Murphy, a trader at Societe Generale Sa in New York, one of the 21 primary dealers that trade with the U.S. central bank.

“We believe that our current ’AA+’ rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling,” S&P said in today’s statement.

Better-than-forecast economic growth stemming from the private sector and remittances from Fannie Mae and Freddie Mac have spurred the Congressional Budget Office to reduce its U.S. deficit forecasts, S&P said.

“We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy,” S&P said. “U.S. economic performance will match or exceed its peers’ in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.”

Moody’s Investors Service and Fitch Ratings, which assign the U.S. their top AAA rankings, have negative outlooks on the U.S.’s credit rating.

Moody’s has said U.S. policy makers must address debt loads projected to rise later this decade to avoid a downgrade.

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