Leaviss: America's prized AAA credit rating 'not untouchable'

M&G’s Jim Leaviss has warned against taking the US’ prized AAA rating for granted as the country continues to inject stimulus and defy current European policies of debt reduction.

Leaviss, the M&G head of retail fixed income, says yesterday's surprise move to further stimulate the US economy has heightened fears for its longer term credit quality.

Treasuries dropped sharply over the stimulus move which could add $1trn to the US debt burden, with the benchmark 10-year yield rising 11bp to 3.23%. The short end of the curve has also been hit hard, with the 2-year yield climbing 6bp to 0.6%.

"We thought the US had really hit what people call the zero bound, where they had no more real room to move on fiscal policy," Leaviss says.

"The market knew they were going to do an extension of the Bush tax cuts, but the additional stimulus on top of that, such as the investment tax breaks, were sort of a surprise to everyone.

"It will be positive to US growth to a certain extent, but as Moody's indicated, it will be bearish for the credit quality of the US government."

While Leaviss admits he cannot imagine a day when the US is downgraded, he believes noises from the credit rating agencies will increasingly be hawkish in the future.

"It has been one of our increasing themes over the past six months, that the US AAA credit rating is not something that is untouchable," he adds.

"I was in the states not too long ago and was talking to the credit rating agencies and it was very clear that they were nervous about keeping the US at a AAA."