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Veteran investor Jim Rogers said he expects the US to lose its AAA-credit rating following last week’s move by Standard & Poor’s to downgrade its outlook for the country to negative.
Speaking exclusively to Investment Week, Rogers said the ratings agency should have slashed the country’s debt rating already, and he expects it to do so as the US becomes ever more indebted.
“Eventually it will happen. Not this month, or this quarter, but it is certainly going to happen,” Rogers said.
“The US is the largest indebted nation in the history of the world and the debt is going higher and higher.
“The government is printing money to solve this problem and I cannot imagine lending money to the US government for 30 years in US dollars at 3%, 4%, 5% or 6% interest, as the government will never be able to pay off those debts.”
Rogers said he is poised to short 30-year treasuries – which are near a four-year high – when yields rise.
The initial reaction to the downgrade in the 30-year treasury market was muted, with yields actually moving lower in the aftermath of the downgrade and ending the week around 4.4%.
Rogers said he expects yields will soar past the 5% mark within the next few years, a call echoed by some of the UK’s leading bond fund managers.
Stars including Old Mutual’s Stewart Cowley and Richard Hodges at LGIM expect yields to climb by the end of the year.
Cowley, who has expressed concern about US treasuries and is shorting them in his £469m Global Strategic Bond fund, said: “We have a soft target of them rising above 5% this year, so we do not want to own the debt.
“The only thing holding it up right now is the lack of credibility in Europe, so there is a lack of alternatives, but this downgrade should bring it to the forefront of investors’ minds.”
Cowley added the US could see its credit rating downgraded in the next few years unless it tackles its burgeoning deficit in a more decisive way.
“It is foreseeable in the next two to three years, in an unreconstructed and unreformed US, ratings agencies have no alternative but to downgrade US credit risk,” he said.
“The ratings agencies are trying to reconstruct their reputation so they are very aware if they do not call this right, their own credibility will be completely shot.”
Hodges, running the £1.5bn Legal & General Investments Dynamic Bond trust, agreed there will be a move higher in yields but said it will not be so dramatic. “I think they will reach 5% but that will be the upper end of the limit,” he said.
Phil Milburn, co-manager of Aegon’s £400m Strategic Bond fund, added: “We agree they are going higher, but not in a straight line, and we think it will be trading rather than trending.
“I do not see 5% this year, probably more like next year instead, although what has undoubtedly been increased by this downgrade is the length of time rates will be left on hold in the US.”
The last time yields on 30-year treasuries went above 5% was in the summer of 2007 when they reached a peak of 5.44%.
The dollar has suffered sharp falls amid growing concerns about the fiscal situation in the US.
The currency has fallen from a high of $1.21 against the euro in the last year to around $1.46, even as the eurozone was rocked by the sovereign debt crisis.
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