Two years after Standard and Poor’s stripped the U.S. of its top rating, America’s credit quality is getting a boost from economic growth outpacing that of the 12 nations graded AAA.
The gap between Treasury five- and 10-year note yields is wider than that for the higher-rated sovereigns, showing fixed- income investors anticipate the U.S. will grow faster than its peers, according to data compiled by Bloomberg. Other measures also show the U.S. improving, as the cost to insure against default is the lowest since 2009, the dollar has risen the most since 2008 and the S&P 500 Index reached a record on Aug. 2.
Investors have rejected the notion that the U.S. is less creditworthy with gross domestic product forecast to grow 2.7 percent in 2014, the fastest of any Group of 10 nation, surveys of economists by Bloomberg News show, while the budget deficit is the least since 2008. While an S&P managing director said in March that other credit raters would “catch up” to its downgrade, the firm and Moody’s Investors Service have since changed their outlooks to “stable” from “negative.”
“The U.S. is really leading the way in the developed world for recovery,” Kathleen Gaffney, a money manager in Boston for Eaton Vance Corp., which oversees $261 billion, said Aug. 2 in a telephone interview. “We’re at an important inflection point where the economy really has the potential to pick up some steam.”
Yield Curve
Yields on 10-year Treasuries ended last week at 2.60 percent, or 124 basis points more than five-year notes, the widest gap in two years. That compares with a 97 basis-point average for the 12 countries rated AAA by S&P, including a difference of 100 points in Germany, whose economy is forecast to expand 1.6 percent in 2014, data compiled by Bloomberg show.
Rather than a referendum on the credit quality of the U.S., the wider so-called yield curve reflects demand by investors for higher rates to own bonds instead of riskier assets with potentially greater returns, such as stocks, as the economy improves. The difference between five- and 10-year Treasury yields was 68 basis points, or 0.68 percentage point, at the end of 2008, according to data compiled by Bloomberg.
“The markets are telling us that we’re due for an acceleration over the next several quarters,” Carl Riccadonna, a senior U.S. economist in New York at Deutsche Bank Securities Inc., said in a telephone interview July 31. The firm is one of the 21 primary dealers that trade with the Federal Reserve.
Roiled Markets
That wasn’t the case for S&P when it cut the U.S. to AA+ on Aug. 5, 2011. The firm cited concern that spending reductions by lawmakers in order to raise the nation’s borrowing limit wouldn’t be enough to reduce the budget deficit and that the wrangling showed the U.S. becoming less politically stable.