Northern Trust has said that Standard & Poor’s decision to downgrade the U.S. Treasury debt will not affect the firm’s view of the U.S. bond market.
Bob Browne, Northern Trust’s chief investment officer, said the downgrade was unlikely to influence the firm’s position on risk assets globally. He noted that Northern Trust has no plans to sell U.S. Treasuries as a result of the downgrade.
“Northern Trust does not see any fundamentally new information in the downgrade about the state of the U.S. economy and the country’s capacity to pay its debt,” said Browne.
Last week, Northern Trust’s chief investment strategist, Jim McDonald, released a research commentary analyzing the deal to raise the government debt ceiling and the political environment that created it. McDonald noted that U.S. fiscal problems, if left unaddressed, were likely to manifest themselves through a weaker dollar rather than higher bond yields. Northern Trust investment experts believe that growth and inflation expectations will determine U.S. bonds yields over the next few years much more than the level of deficits.
“Looking globally, S&P downgraded Japan to AA- in January of this year; that country’s bond yields have declined since then and remain substantially below those of the United States,” Browne said. “Multiple factors determine the level of yields in the high quality sovereign debt market beyond credit trends.” Browne said a key risk scenario is the potential impact of the U.S. downgrade on Europe. “The situation there remains fragile and the downgrade of the U.S. likely will highlight the fact that Europe has less time than the U.S. to get its fiscal house in order,” he said.
With regard to money market funds, Browne noted that short-term ratings of the U.S. remain unchanged by S&P, remaining at A1+, the highest level. The firm also emphasized that the Federal Reserve stated that the S&P decision will not affect U.S. banks’ risk-based capital requirements for U.S. Treasuries, and that this should address any market concerns about the impact on the financial services industry.