"Earlier there seemed to be much more discussion about a much larger deficit reduction packages," Steven Hess, the senior credit officer at Moody's in New York, said July 29 in a telephone interview. "The smaller the actual reduction, the more likely a negative outlook."
'Bragging Rights'
If the U.S. was cut by S&P or Moody's for the first time in history, any disruptions would be unlikely in the Treasury market, said Freund of USAA Investment. JPMorgan Chase & Co. estimates that funds holding Treasuries may only need to sell as much as $40 billion of the debt in a downgrade.
"The difference between AA+ and AA and AAA really is going to be very modest outside of bragging rights," Freund said. "I feel better about Treasuries in the long run if we address the problems now rather than just kicking the can down the road."
Prospects for lower expenditures by the government come as signs emerge that the economy is faltering with unemployment above 9 percent. Government spending accounts for about 25 percent of gross domestic product, a level exceeded only by three years in the 1940s, according to Bianco Research LLC in Chicago.
The Institute for Supply Management said yesterday that its factory index slumped to 50.9 for July, the lowest since July 2009, from 55.3 a month earlier. Figures less than 50 signal contraction, and the July index was lower than the most pessimistic forecast in a Bloomberg News survey.
"With these numbers that are coming in, we could we be looking at another recession and if so, should we be buying bonds," said Laura LaRosa, director of fixed income at Philadelphia-based Glenmede, which oversees $20 billion. "When you have slow growth you're a little bit closer to recession. That makes everybody very concerned."