While they have not gone the route of Standard & Poor’s by outright downgrading U.S. debt, the last of the ratings agencies, Fitch, did cut the future outlook on the U.S. to Negative from Stable.
While S&P is the only one of the three agencies to cut their rating Fitch’s Negative outlook carries with it the better than even chance of a ratings downgrade within two years. The inability of the U.S. Senate ‘Super Committee’ to come to an agreement on spending cuts led to the action by Fitch, in spite of the fact that this indecision would trigger a decrease in baseline budgeting by $1.2 trillion over 10 years.
Reports that these are cuts to actual dollars spent are greatly exaggerated.
All of this happens against a backdrop of an unprecedented rise in U.S. bond prices since the August 5th downgrade by S&P. Fueled by the Fed’s Operation Twist 2 and unprecedented uncertainty in the European bond market capital has fled in a flood towards U.S. Treasuries. Yields on the benchmark 30 year Treasury Bond have fallen from 3.82% to 2.91% as of Monday’s close.
Without any major shocks to the financial system the U.S. is facing a debt to GDP ratio of 90% by 2020 which would threaten its AAA rating. Given the current uncertainty in global markets that would have to be considered a best case scenario.
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