Bill Gross, manager of the world's biggest bond fund, warned on Thursday the United States will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure.
The United States will face a downgrade in at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today, Gross told Reuters.
Gross, the co-chief investment officer of Pacific Investment Management Co. and manager of the Pimco Total Return Fund, which has $154 billion in assets, earlier had told Reuters via email that market declines on Thursday were due to investor fears that the United States is going the way of the UK -- losing AAA rating which affects all financial assets and the dollar.
Standard & Poor's on Thursday lowered its outlook on Britain to negative from stable, threatening the nation's top AAA rating. Britain faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product.
European shares fell as S&P's potential UK credit cut added to worries sparked by news on Wednesday that Federal Reserve policy-makers had cut their U.S. growth forecasts over the next three years. The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 2.1 percent to 857.52 points, breaking five successive sessions of gains.
U.S. equities also slumped, and Treasuries and the dollar -- which typically rise on a bid for assets perceived as lower risk when stocks fall -- also declined as worries about swelling U.S. deficits soured investors on U.S. assets.
The Dow Jones industrial average <.DJI> closed down 129.91 points, or 1.54 percent, at 8,292.13, while the Standard & Poor's 500 Index <.SPX> was down 15.14 points, or 1.68 percent, at 888.33.
The benchmark 10-year U.S. Treasury note was down 51/32, with the yield at 3.3756 percent. The 2-year U.S. Treasury note was down 2/32, with the yield at 0.8668 percent. At the longer end of the yield curve, the 30-year U.S. Treasury bond was down 101/32, with the yield at 4.3304 percent.
In currencies, the dollar was down against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 0.76 percent at 80.57 from a previous session close of 81.190. The dollar extended losses against the yen, dipping below 94 yen for the first time in two months.
U.S. Treasury Secretary Timothy Geithner also sounded alarms on the burgeoning budget deficit and its impact on the greenback.
We must get our fiscal house in order or risk having government borrowing crowd out productive private investment, said Geithner in testimony before a congressional panel on Thursday. He said the administration has to make sure its policies help retain confidence in the dollar's value.
My basic obligation is to make sure we put in place policies that sustain confidence in this economy, in our currency, that we sustain a strong dollar, Geithner said.
Meanwhile, U.S. credit rating agency Moody's Investors Service on Thursday said it is comfortable with the AAA rating on the United States, but it is not guaranteed forever.
There are longer-term pressures on the rating, that's very clear, said Steven Hess, lead analyst for Moody's.
Standard & Poor's, asked on Thursday about market moves on concerns about the U.S. sovereign credit rating, cited its January affirmation of the AAA rating.
S&P analysts Nikola Swann and John Chambers wrote at that time that their affirmation came despite our judgment that fiscal risk has noticeably increased, but saw that deterioration as temporary.
(Additional reporting by Dena Aubin and Walden Siew; Editing by Leslie Adler)