S&P Announces Potential Downgrade of US Bonds

Credit rating agency Standard & Poor’s announced yesterday that it may downgrade US Treasury bonds from their current AAA rating if the large-looming debt ceiling problem is not resolved.

(July 15, 2011) – United States government bonds may lose their AAA credit rating as the Treasury wrestles with the current US debt ceiling, credit rating agency Standard & Poor’s (S&P) announced yesterday in a press release.

Since the US reached its debt ceiling of $14.3 trillion on May 16, the Treasury has taken drastic measures to remain below the ceiling. Still, the ceiling is closing in: according to the S&P release, the measures that have been taken thus far to remain below the debt ceiling will expire on or around August 2 of this year.

While some remain confident that Congress will strike a deal to raise the debt ceiling, S&P has expressed doubts about the deal’s completion. “The positions of the administration and the Republican leadership are still very far apart…the tone of the debate has made us wonder whether a compromise can be achieved,” S&P managing director John Chambers said in a Washington Postarticle.

Currently, US Treasury bonds hold a AAA long-term rating and a A-1+ short-term rating. According to the S&P report, the long-term rating may fall into the AA range, “If we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.” However, if the US defaults on any of its debt obligations, it will be downgraded to selective default, or SD.

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If US bonds are downgraded, the US will lose investments from institutional investors because investment guidelines at most pension funds and other institutions prohibit investment in junk-rated (sub-AAA) bonds. Such repercussions have already been felt in Greece, Ireland, and Portugal – all of which have been downgraded in the past year.

The move by S&P has attracted negative attention from many US politicians. “Moody’s is representing people who stand to gain from the US being able to issue more financing. This is an unwarranted interference in the political process and continues to raise questions about conflicts of interest among the rating agencies,” said Ohio Congressman Dennis Kucinich in a CNN report.

This criticism continues a run of questioning and controversy surrounding one of the world’s best-known credit rating agencies. In June, aiCIO wrote about the Securities and Exchange Commission’s investigation into credit rating agencies’ role in the financial crisis.

By Justin Mundt

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Japanese corporate pension plans will likely triple their allocations to alternative assets as they seek to boost returns in anticipation of the retirement of their rapidly aging beneficiaries, Credit Suisse has said.

(July 15, 2011) – Japanese corporate pension funds worth a collective $760 billion are showing increasing interest in alternative assets like hedge funds, private equity, and real estate, and will likely triple their allocation in the asset class, Credit Suisse has said.

Japanese corporate pension plans are in vise as demographic reality collides with a weak economy battered by the March 11 earthquake and tsunami, and they are increasingly looking to alternatives like hedge funds to shore up returns. Typical pension plans allocate 2 to 5% to alternatives and many plans are moving to up that allocation to about 10 to 15% in the next two years, according to an analysis offered by Credit Suisse.

“What’s interesting to us right now is how important the institutional investors in Japan are for hedge funds,” Benjamin Happ, Hong Kong-based Asia-Pacific head of capital services in Credit Suisse’s prime services division, said to Bloomberg. “The investor-base in Japan today is the largest and most important group of hedge funds investors in all of Asia and we prioritize it accordingly.”

Japanese corporate pension plans are looking to invest in single hedge fund managers over fund-of-funds, Happ said. Analysts have questioned the efficacy of the fund-of-funds approach over directly investing in single managers, pointing to the additional fees that fund-of-funds reap on top of the hedge fund managers’ fees. Japanese corporate plans seeking out single managers indicates that their level of sophistication has increased, Happ said.

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“There were concerns that the earthquake and subsequent events surrounding it will dampen the interest-level of Japanese investors in hedge funds, but that has not at all been the case,” Happ explained. “If anything, the events in March have exacerbated or highlighted the need to have portfolios that are more diversified in their construction.”

Japanese corporate funds were not alone in feeling the pressure from the island nation’s weak economy. Japan’s Government Pension Investment Fund, the world’s largest asset owner with about $1.4 trillion in assets, took an investment loss of about 5% in the 2010 fiscal year, aiCIO has reported.

As institutional investors around the world lick their wounds from the 2008 market collapse, the hedge fund industry has flourished, with asset owners turning to hedge funds to recoup their losses from the crash. Industry assets reached $2.02 trillion as of March 31, 2011, according to Chicago-based Hedge Fund Research (HFR), aiCIO has reported. The new peak eclipsed the previous second quarter of 2008 record of $1.92 trillion.

<p>To contact the <em>aiCIO</em> editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a></p>