Salient to Investors:
S&P lowered its outlook on Britain’s top credit rating to negative, citing weak economic growth and a worsening debt profile – there is a 1-in-3 chance the rating could be cut in the next 2 years. S&P however expects economic growth to accelerate slowly.
Investors often ignore such actions, evidenced by the drop in French 10-yr bond yields following a downgrade last month and a rally in Treasuries after the US lost its top rating at S&P in 2011.
S&P said Britain’s ratio of debt to GDP will continue to rise in 2015 and peak at 92 percent.
Ned Rumpeltin at Standard Chartered said that even with the potential for a downgrade, sterling still has a credit-rating advantage over many other countries.
Fitch Ratings said that missing the debt target weakens the credibility of the UK’s fiscal framework.
Alan Clarke at Scotiabank Europe said the UK has suffered persistent slippage since mid-2010 so the odds are skewed towards a downgrade – the UK is already facing an uphill battle in 2013.
Bloomberg says that, going back to 1974 ,about half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline.