No impact on bonds despite Fitch warning on debt ceiling

Reuters

By Eleanor Duncan

NEW YORK, Aug 24 (IFR) - Fitch Ratings' warning this week that it would review the US sovereign's Triple A rating "with potentially negative implications", if the country's debt ceiling was not increased by October, had no impact on dollar credit markets.

The warning had "little relevance" to the high-grade corporate bond market, said a Bank of America Merrill Lynch report.

The debt ceiling has to be raised by September 29 or the government may not be able to borrow more money or pay its bills, said the US Treasury department.

A similar showdown prompted S&P Global to cut the US's top credit rating in August 2011 by one notch to AA+ on concerns over the high level of debt and clashes over the debt ceiling in Congress.

High grade spreads widened around 100bp that time, but it had very little to do with the downgrade and more to do with turbulence in the Eurozone, an investor said.

"The global macro economy is performing well, and the Eurozone is on an improving trend," the investor said. "Even if the [downgrade] happens, spread reaction should be a non-event."

Investors and analysts do not expect a major sell off in corporate bonds this time also as corporate fundamentals were strong and they had faith in the ability of US corporations to pay back their debt.

The average high-grade bond spreads widened 1bp in the last 10 days while the high-yield bond spreads widened 3bp in the same period - reflecting market's confidence in dollar debt.

In fact if there was a government shutdown because the ceiling was not increased, US Treasuries were more likely to rally due to a flight to safety bid, said Matt Brill, senior portfolio manager at Invesco.

"But I don't expect anything material to happen," he said. "There may be a little softness in high-grade as investors try to digest the implication, but the long-term impact is zero."

BAML analysts said they don't expect more than 20bp of spread widening in high-grade bonds if at all the government was shut down.

Most expect the Congress to ultimately raise or suspend the debt ceiling after loads of heated political bickering in the next few weeks.

"If the debt ceiling is not raised in a timely way, we expect, at a AA+ level of confidence, that the government will take necessary measures to avoid default on the debt which our ratings address," a spokesperson from S&P Global Ratings said in an emailed statement to IFR.

Moody's released its annual US credit analysis Thursday, where it maintained the US government's Aaa rating and stable outlook. The ratings agency noted the US's "formidable strengths", which allow it to maintain a higher level of debt than would be possible for other countries.

"Government shutdowns are disruptive, but they have no bearing on the ability of the US government to meet its debt obligations," Sarah Carlson, senior vice president in the sovereign risk group at Moody's, told IFR.

"Now if an interest payment was missed - that would have ratings implications," she said.

US Treasuries are the deepest and most liquid government bond market in the world, Carlson said.

"There are a lot of structural strengths to the US that observers take for granted," Carlson said. "That includes the sheer size of the US, the diversification of the economy, the US's share of global trade and the role the dollar plays as a reserve currency."

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