PIMCO says, US will be downgraded again

The US’ sovereign credit rating will be cut as “Fiscal Theater” plays out in the world’s biggest economy, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.

“The US will get downgraded, it’s a question of when,” Scott Mather, Pimco’s head of global portfolio management, said at a briefing in Wellington, New Zealand. “It depends on what the end of the year looks like, but it could be fairly soon after that.”

The Congressional Budget Office has warned the US economy will fall into recession if $600-B of government spending cuts and tax increases occur at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year, Mr. Mather said.

In a “base case” of Obama being re-elected and Congress becoming more Republican, there is a high likelihood an agreement “does not happen in a nice way, and we have disruption in the marketplace,” he said.

Policy makers probably will agree on cutbacks that would lower economic growth by about 1.5% next year, Mr. Mather said. They may roil markets by discussing scenarios that would lead to a 4.5% fiscal drag, he said.

Standard & Poor’s cut the U.S. credit rating to AA+ from AAA on 5 August 2011. Since that time, benchmark US Treasury yields have dropped to record lows.

S&P last week cut Spain’s debt rating to BBB-, the lowest investment grade, and placed it on negative outlook.

“Almost all sovereigns with poor debt dynamics are going to get downgraded, we aree just talking about the pace,” Mr. Mather said. Credit rating companies “have been slow in downgrading some sovereigns, but we think the pace probably picks up in the year ahead.”

Pimco forecasts global growth of 1.75% in the year through September 2013, weighed down by a Eurozone recession and a slowing pace of expansion in China.

 

Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

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