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US debt ceiling default threat leaves bond investors unmoved

Even as a US default looms, treasury yields continue to set new lows and the dollar remains relatively stable. Investors simply don’t believe the hype about the consequences of a ceiling breach and have not priced them in.

For a bad news week it takes some beating. When Moody’s placed the US sovereign’s sacrosanct triple-A rating on review for possible downgrade on July 13, Standard & Poor’s, which had already lowered its long-term ratings outlook to negative in April, added the US’ A-1+ short term rating to the negative watch list, noting that there was a “one-in-two likelihood that we could lower the long-term rating on the US within the next 90 days”.

But despite the double-barreled warning shot, treasuries barely flinched.

If anything, rates markets appear supported by the economic prognosis and credit can only take heart from US Federal Reserve chairman Ben Bernanke’s assurance that the Fed will re-open its quantitative easing programme should the economy require it. Notwithstanding some relatively minor movement, yields across the curve remain at annual lows as global investors demonstrate their trust in the full faith and credit of Uncle Sam.

Shahid Ikram, head of global sovereigns at Aviva Investors in London, says that after filtering out short-term political noise from the decision-making process, the fundamental economic data implies that US rates will remain low.

“There are larger portfolio drivers at work,” he says. “It appears that the US is back above its 2007 peak, but the private sector is well below its peak.