The outlook on the U.S.’s AAA credit-ranking was raised to stable from negative by Fitch Ratings after Congress suspended the nation’s debt limit for more than a year, reducing the risk of a default, and as federal deficits decline.
The ratings company’s adjustment follows Moody’s Investors Service and Standard & Poor’s, which raised their outlooks last year on the U.S. to stable from negative. S&P stripped America of its top grade in August 2011, citing, in part, political wrangling about the debt limit. Moody’s gives the nation its top Aaa grade.
The issuer of the world’s reserve currency avoided a downgrade as stronger growth is forecast by a government agency to reduce the budget deficit to a seven-year low as a share of the economy.
“While the mood in Washington is anything but collegial,” there have been some signs of increased cooperation, Tony Crescenzi, executive vice president at Newport Beach, California-based Pacific Investment Management Co., said in an e-mail before the outlook change, citing lawmakers’ agreement on budget outlays in 2014.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.
The benchmark 10-year Treasury note yield was little changed at 2.77 percent at 6:46 a.m. in New York, according to Bloomberg Bond Trader prices.
Fitch had warned since October that political disputes linked to the borrowing limit might spur a downgrade from AAA when it placed the country on Rating Watch Negative. The U.S. was assigned a negative outlook by Fitch in November 2011.
“The federal debt limit was suspended in mid-February in a timely manner and in a way that avoided casting uncertainty over the full faith and credit of the U.S., in contrast to the crises in August 2011 and October 2013,” Fitch said in a statement.
The jointly-owned subsidiary of Paris-based Fimalac SA and New York-based Hearst Corp., Fitch is registered with the European Securities and Markets Authority, a regulator that oversees the industry. Fitch agreed to disclose a statement about the U.S. rating on March 21 as part of European rules.
Congress suspended the debt limit until March 15, 2015, while income tax payments are projected to further postpone the date when the government may exhaust its borrowing authority.
At the same time, tax revenue needed to pay the government’s bills is forecast to grow this year more than three times as fast as spending.
The U.S. fiscal 2014 deficit will narrow to $514 billion, or 3 percent of gross domestic product, from $680 billion last year, the Congressional Budget Office said Feb. 4. The projected gap is down from 9.8 percent of GDP in 2009, the widest in records dating back to 1974, and is close to the average of the past four decades, the agency said.
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