(Editor’s Note: This story was written prior to the downgrade, but page 2 offers some tips on investment Safe Havens.)
With a House vote on Speaker John Boehner’s bill to lift the debt ceiling delayed Thursday night, the business community is battening down the hatches for a U.S. debt rating downgrade—and they’re not happy about damage that the oncoming economic storm will wreak on investors.
An ad hoc coalition of asset managers, investment advisors and pension plans on Tuesday sent an open letter to President Barack Obama and members of Congress, begging them to “fix the deficit for real” and act now to raise the debt ceiling.
“Addressing the current federal debt ceiling crisis, by itself, will not fix the entire problem. We would be deluding ourselves as a nation. If we want strong economic growth and job creation we must fix the deficit for real, for good, for the future of all Americans,” said the coalition in its letter. “As a debtor nation, America must show the world that the nation’s word is its bond. Raising the debt ceiling is vitally important, but that alone is not enough. The huge budget deficit, both current and long-range, must be dealt with urgently as well.”
The coalition is comprised of a diverse group that includes asset management giant BlackRock, Commonwealth Financial Network, Legg Mason, LPL Financial, Raymond James, Verizon, the North Carolina Retirement System, the Florida State Board of Administration, the New Jersey Division of Investment and the Teachers Retirement System of Texas.
Boehner delayed a vote Thursday night on his debt-limit bill because he did not have enough Republican support to pass it. He would need 216 votes to pass the bill and send it to the Senate, where Majority Leader Sen. Harry Reid said the bill would be dead on arrival because Democrats would not pass it in its current form. Reid is waiting for the outcome of Boehner’s bill before introducing his bill to raise the debt ceiling.
Resigned to a Downgrade
While the coalition warned that America may lose its triple-A debt rating if U.S. leaders fail to act, other investment professionals have already resigned themselves to a downgrade. But the consensus is that a default on U.S. debt is unlikely. Either way, as they await an outcome on Washington’s stalemate, market players are scrambling to find investment opportunities and safe havens in light of the unpredictable state of play.
The bond market is already pondering what life will be like without a triple-A rating, asserted LPL Financial Market Strategist Anthony Valeri in an analysis written on Tuesday.
“If an agreement is not reached in time, which we view as highly unlikely, we still believe the Treasury will be able to service its debt obligations but will likely result in a ratings downgrade even if temporary. Although President Obama and Congress remain at odds over how to resolve the debt ceiling impasse, we continue to believe that a deal will be struck before the Aug. 2 deadline,” Valeri said.
Of the three major ratings agencies, Standard & Poor’s has taken the harshest tone in stating that it would like to see meaningful steps to reduce the long-term deficit in order to avoid a rating downgrade, according to Valeri. “With the Aug. 2 deadline merely one week away, time is running out, and the odds of more substantial budget reductions being implemented in time are dimming. S&P may therefore downgrade Treasuries in coming weeks or months after it reviews any debt deal.”