Very little mention of this story in the financial press, but this is how sovereign bond routs begin. We already borrow 43 cents of every Federal dollar to make our bloated budget, and apparently Congress thinks that's not enough. They're aiming for 50 cents this time, suckers.
And Moody's thankfully, is throwing up a roadblock, though Congress won't see it of course, until it's far too late.
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Moody's warned Monday that it could move a step closer to cutting the U.S. AAA rating if President Obama's tax and unemployment benefit package becomes law. The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.
A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.
- "From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.
After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.
- If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.
In a market obsessed with the euro sovereign debt crisis, the Moody's note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.
A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.
- Moody's estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.
"This is a very high ratio compared with both history and other highly rated sovereigns," Moody's said.
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Links from this morning...
BofA looks to sell toxic mortgages worth $1 billion
http://www.reuters.com/article/idUSTRE6BC19320101213
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Fed seen staying with $600 billion bond buy plan
WASHINGTON (MarketWatch) — The Federal Reserve’s formal policy meeting Tuesday is expected to be a quiet affair as the central bank battens down the hatches to protect its innovative and controversial bond-buying program from a swirling political storm.
http://www.marketwatch.com/story/fed-seen-staying-with-600-billion-bond-buy-plan-2010-12-11
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NEW YORK (MarketWatch) — Treasury prices fell further Tuesday, pushing 10-year yields to the highest in six months, after a pair of reports showed U.S. retail sales and wholesale prices last month were stronger than economists had anticipated.
http://www.marketwatch.com/story/treasurys-fall-after-retail-sales-ppi-report-2010-12-14
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