S&P-Induced U.S. Bonds Selloff May Be Short-Lived, Dealers Say - San Francisco Chronicle

(For more on S&P's downgrade of the U.S. credit rating, see {EXT3 <GO>}.)

Aug. 8 (Bloomberg) -- Any selloff in Treasuries and the dollar following Standard & Poor's first ever downgrade of the U.S. from AAA is likely to be short-lived amid slowing economic growth and Europe's debt crisis, according to Wall Street banks.

JPMorgan Chase & Co. said a drop in Treasuries from the ratings cut is unlikely to be "sustained," while Citigroup Inc. said dollar selling isn't forecast to be entrenched. Barclays Plc said the downgrade shouldn't be "significant," and UBS AG said the top ranking for U.S. short-term debt will prevent money funds from being forced to react.

For all the handwringing over the credit-rating cut, bond investors from Wall Street banks that trade directly with the Federal Reserve to policy makers in China and Russia are likely to retain their holding of Treasuries as they see few alternatives to the world's deepest and most liquid market. The dollar remains the world's reserve currency even as S&P cut the U.S. one level to AA+ while keeping the outlook at "negative" on Aug. 5, citing the political failure to reduce record deficits while Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2.

"The markets are pretty-well braced and have priced this in," said Laura LaRosa, director of fixed income at Philadelphia-based Glenmede, which oversees $20 billion. "Certainty, we would not cut our Treasury holdings on the S&P downgrade. We don't think there's going to be a huge violent swing."

Buffett, Greenspan

Billionaire Warren Buffett said in an interview with Betty Liu at Bloomberg Television that S&P erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years. The nation merits a "quadruple A" rating, Buffett, 80, said Aug. 6.

Former Fed Chairman Alan Greenspan, speaking on NBC's "Meet the Press," said that U.S. government bonds are safe investments. "Very much so," he said Aug. 7.

The cost to insure U.S. debt against default is less than that of AAA rated Germany, France, Australia and the U.K., according to data provided by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps that protect against default on U.S. notes for five years fell 11 percent last week to 55.4 basis points, CMA data show. That compares with an increase of 15.6 percent to 74.2 for swaps linked to Germany, an 18.2 percent climb to 143.8 for France, a 21.5 percent rise to 69.3 for Australia and a 4.5 percent increase to 77 for U.K. government securities.

Note Yields

Yields on 10-year notes dropped 24 basis points last week or 0.24 percentage point, to 2.56 percent after falling as low as 2.33 percent on Aug. 5, according to Bloomberg Bond Trader prices amid signs of stalled economic growth and a widening sovereign-debt crisis in Europe. The two-year note yield dropped seven basis points to 0.29 percent. It touched a record 0.2527 percent on Aug. 4.

Treasuries have returned 5.29 percent this year, according to Bank of America Merrill Lynch data, outperforming the 4.63 percent decline in the Standard & Poor's 500 Index.

JPMorgan said 10-Treasury yields will likely increase to 3 percent by the end of the year, compared with an earlier forecast of 3.5 percent, on a "poorer growth outlook," according to an Aug. 5 report from analysts led by Terry Belton, global head of fixed-income and foreign-exchange research.

Investor Comfort

"We do not anticipate forced selling of U.S. Treasuries from any significant investor base," Barclays analysts Ajay Rajadhyaksha and Anshul Pradhan wrote Aug. 6 in a research report. "U.S. Treasuries remain the flight-to-quality asset class of choice, and we do not believe S&P's action will change that in investors' minds."