The debt ceiling agreement in Washington might not save the U.S.'s AAA credit rating, but it should avoid a worst-case outcome, market watchers say.
Erik Knutzen, chief investment officer with investment consultant NEPC, said the package politicians have agreed on looks set to deliver roughly half of the deficit reductions ratings agencies have called for, making a ratings downgrade still likely.
The fallout from that downgrade shouldn't be disastrous in the near term, however, as concerns about a weak U.S. economy continue to weigh on rates, more than offsetting any upward pressure that a downgrade might otherwise cause, he said.
Chris Orndorff, a portfolio manager with Western Asset Management, said his firm has been talking about a possible downgrade with clients, who remain convinced that the liquidity offered by U.S. Treasuries and the status of the U.S. dollar as a reserve currency will remain compelling even if agencies lower their ratings on U.S. debt to AA. There won't be a knee-jerk reaction, he predicted.
Peter R. Fisher, a senior managing director with BlackRock and global head of the firm's fixed-income portfolio management, said the debt ceiling agreement should alleviate fears that politicians would actually “shoot a hole in the bottom of the boat,” while lowering the odds of agencies downgrading their U.S. debt ratings.
Beyond that, details on the timing and composition of government spending cuts will have a significant impact on near-term growth, he said. With corporate investment one of the last available levers to boost the economy, it remains to be seen whether there will be a boost to business confidence coming from the political resolution in Washington, Mr. Fisher said.