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S&P revises US credit rating to stable

The US’s “AA+” credit rating outlook was increased to stable from negative by Standard & Poor’s, based on receding fiscal risks, less than two years after the company stripped the world’s largest economy of its top ranking.

The US has a less than one-in-three likelihood of a downgrade in the “near term” with the revision, S&P said on Tuesday in a statement.

The New York-based company said it sees “tentative improvements,” such as the deal politicians reached to resolve what became known as the fiscal cliff and through spending cuts in the Budget Control Act of 2011.

US government debt as a percentage of gross domestic product (GDP) will likely be stable at about 84 percent for the next few years, S&P said. That may give policy-makers additional time to address spending on Social Security and health care, which is expected to grow as the population ages, S&P said.

S&P, the world’s largest credit rater, for the first time cut the US ranking from “AAA” in August 2011, contributing to a global stock-market rout and sending yields on Treasury debt to record lows as investors sought a refuge in the world’s most easily traded securities.

“We see some improvement lately in terms of moving, if gradually and hesitantly, but nevertheless toward some fiscal consolidation,” Nikola Swann, an S&P credit analyst, said today in a webcast. “With the fiscal cliff deal earlier this year, there was at least some limited willingness and ability to compromise shown between the two parties, even if it was a last-minute deal.”

Downgrades don’t necessarily correspond to higher borrowing costs. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg on Moody’s Investors Service and S&P grades.

Yields on benchmark 10-year Treasuries dropped 0.74 percentage point in the seven weeks following the August 2011 downgrade to a then-record 1.67 percent.

Treasuries declined today on bets the increase in the outlook boosted the odds that the Federal Reserve may slow the pace of monetary stimulus.

“More positive news on the economy will be something that guys will say helps the Fed out with the case to start pulling back,” said Sean Murphy, a trader at Société Générale SA in New York, one of the 21 primary dealers that trade with the US central bank.

Yields on 10-year notes rose four basis points, or 0.04 percentage point, to 2.21 percent at 4:31 p.m. in New York. The 30-year yield increased four basis points, or 0.04 percentage point, to 3.37 percent after touching 3.38 percent, the highest since April 2012.

“The improving US economy is boosting government revenues, the sequester has trimmed spending, and uncertainties about growth in China and Europe make the United States the preferred destination for global investors,” said Phillip Swagel, former Treasury assistant secretary for economic policy in the George W. Bush administration and now a professor at the University of Maryland.

Automatic budget cuts, known as sequestration, began to go into effect on March 1.

The US downgrade by S&P in 2011 reflected in part the political impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load and weakening “effectiveness, stability, and predictability of American policy-making and political institutions.”

“We believe that our current ‘AA+’ rating already factors in a lesser ability of US elected officials to react swiftly and effectively to public-finance pressures over the longer term in comparison with officials of some more highly rated sovereigns, and we expect repeated divisive debates over raising the debt ceiling,” S&P said in today’s statement.

Better-than-forecast economic growth stemming from the private sector and remittances from Fannie Mae and Freddie Mac have spurred the Congressional Budget Office to reduce its US deficit forecasts, S&P said.

“We do not see material risks to our favorable view of the flexibility and efficacy of US monetary policy,” S&P said. “US economic performance will match or exceed its peers’ in the coming years. We forecast that the external position of the US on a flow basis will not deteriorate.”

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said the outlook change shows S&P is backtracking from its downgrade.

“At some point they have to get back in line and get the US government back up to “AAA,” Baker said. “This is the first step.”

Moody’s and Fitch Ratings assign the US their top “AAA” rankings with negative outlooks. Moody’s has said US policy makers must address debt loads projected to rise later this decade to avoid a downgrade.

Bloomberg News

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