Moody's Investors Service raised the pressure on U.S. lawmakersto increase the government's $14.3 trillion debt limit by placingthe nation's credit rating under review for a downgrade.

The U.S., rated Aaa since 1917, was put on review for the firsttime since 1995 on concern the debt threshold won't be raised intime to prevent a missed interest or principal payment onoutstanding bonds and notes, even though the risk remains low,Moody's said in a statement yesterday. The rating may be reduced tothe Aa range, and there is no assurance Moody's would restore itstop rating, even if a default is quickly “cured.”

President Barack Obama is considering summoning congressionalleaders to Camp David this weekend to work on a plan to raise thedebt ceiling after yesterday's negotiations on a deficit-cuttingplan of at least $2 trillion stalled, according to two peoplefamiliar with the matter. A default resulting from a failure toraise the debt limit may lead to slower economic growth and anotherfinancial crisis.

“It's obviously very serious in so many different ways,”said James Caron, head of U.S. interest-rate strategy at MorganStanley in New York, one of 20 primary dealers that trade bondswith the Federal Reserve. “Most people still believe there will besome type of an agreement struck to avoid all this stuff, andthat's what the market's banking on.”

Dollar, Bonds
The dollar weakened andTreasuries declined after the Moody's statement.IntercontinentalExchange Inc.'s Dollar Index, which tracks thegreenback against the currencies of six U.S. trading partners,including the euro, yen and pound, slid for a third day, shedding0.4 percent as of 9:53 a.m. in London.

The 10-year Treasury yield rose three basis points to 2.91percent, according to Bloomberg Bond Trader prices. The price ofthe 3.125 percent security due in May 2021 declined 1/4, or $2.50per $1,000 face amount, to 101 25/32.

The cost of insuring Treasuries rose five basis points to 56.5basis points, the highest since February 2010, according to CMAprices for credit-default swaps.

The risk of a default is causing concern in Asia. China is thebiggest foreign holder of Treasuries and Japan ranks No. 2.

Dagong Global Credit Rating Co., a Chinese company, said todaythat it was putting its A+ rating for the U.S., the fifth-highestlevel, on “negative watch,” citing the nation's deterioratingability to repay debt.

Assessing Risks
China needs to “seriouslyassess the risks” of its holdings as the U.S. faces a “worrisome”economic outlook, Yu Bin, a senior government researcher, toldreporters at a briefing in Beijing today.

The nation hopes the U.S. will adopt “responsible policy toensure investors' interests,” Chinese Foreign Ministry spokesmanHong Lei said at a separate briefing.

The Aaa ratings of financial institutions directly linked to theU.S. government, including Fannie Mae, Freddie Mac, the FederalHome Loan Banks, and the Federal Farm Credit Banks, were also puton review for cuts, Moody's said. It also placed 7,000 municipalratings on review for possible downgrade.

“What we're looking for is a raising of the limit. It doesn'tmatter the process that they get there,” Steven Hess, the seniorcredit officer at Moody's in New York, said in a telephoneinterview.

Obama's Exit
Senate Republican LeaderMitch McConnell proposed a “last choice option” on July 12 thateffectively would grant Obama power to raise the debt limit ininstalments. McConnell's plan would let the president raise thelimit in three stages unless Congress disapproves by a two-thirdsmajority, while Obama would also be required to propose offsettingspending cuts.

The spending reductions would be advisory, and the debt-ceilingincrease would occur regardless of whether lawmakers enact thecuts.

Obama “abruptly” walked out of yesterday's White House meetingwith legislative leaders on the federal deficit, House MajorityLeader Eric Cantor, a Republican from Virginia, told reporters.

“This report underscores the warning I outlined months ago,”House Speaker John Boehner, Republican of Ohio, said in astatement. “If the White House does not take action soon to addressour nation's debt crisis by reining in spending, the markets may doit for us.”

“I think it reflects what we all know — that this is a serioustime and serious discussions and we can't continue to have peoplenot contribute to solving this problem,” said Senator Patty Murrayof Washington, the No. 4 Democratic leader in the chamber.

Reaching a Deal
Standard & Poor's putthe U.S. government on notice on April 18 that it risks losing itsAAA credit rating unless policy makers agree on a plan by 2013 toreduce budget deficits and the national debt. The firm said at thetime that there's a one-in-three chance that the rating might becut within two years and that its “baseline assumption” is thatCongress and the Obama administration will come to terms on a planto reduce record deficits.

S&P would lower its sovereign top-level AAA ranking to D,the last rung on its scale, if the U.S. can't make its paymentsbecause of a failure to raise the debt ceiling, John Chambers,chairman of the sovereign rating committee, said June 30.

The U.S. is among 17 countries, from Australia to Canada toSwitzerland, rated Aaa by Moody's. S&P gives 18 countries itstop ranking.

It's likely that the debt ceiling will be raised without acredible plan for debt reduction, pushing yields higher forlonger-term securities, according to Bank of America Corp.

Debt Trajectory
A debt-ceiling increasebefore Aug. 2 would lead yields on 30-year Treasury bonds to risefaster than five-year notes, reflecting increased concern that thelong-term fiscal situation will worsen, wrote analysts led by PriyaMisra, head of U.S. rates strategy in New York at Bank of AmericaMerrill Lynch.

“The rating outlook will be determined by the longer-term debttrajectory,” Hess said yesterday of the Moody's rating.

Treasury Secretary Timothy F. Geithner said he has taken stepsto prevent a federal default until Aug. 2, using accountingmeasures that involve two retirement funds. The U.S. reached itsborrowing limit on May 16.

The Moody's announcement is a “timely reminder” that Congressmust “move quickly” to avoid default, the Treasury said in astatement.

Government bonds yields are at about the lowest this year.Ten-year yields remain below 3 percent, compared with an average of7 percent during the past four decades. Two-year U.S. governmentdebt yields 0.37 percent, compared with the low for 2011 of 0.32percent on June 24.

Temporary-Default Scenario
Demand has beenhigher than average this week at the Treasury's auctions of three-and 10-year notes this week as investors continue to seek a U.S.refuge from Europe's worsening sovereign-debt crisis.

While yields remain low, investors remain concerned they willincrease as the borrowing deadline approaches.

Yields on 10-year notes would rise about 37 basis points if theU.S. government temporarily misses a debt payment while promisingto make bondholders whole as soon as the debt limit was raised,according to the average estimate of 45 JPMorgan Chase & Co.clients that were surveyed by the firm. Foreign investors forecastyields would rise 55 basis points.

An increase in Treasury yields of 50 basis points would reduceU.S. economic growth by about 0.4 percentage points, JPMorgan saidin a report, citing Fed research and data.

“It certainly underscores the importance of passing the debtceiling and not putting us in default status, and making surethere's a longer-term fiscal plan to contain spending and thedeficit we've been running up over the last few years,” saidAnthony Cronin, a trader at primary dealer Societe Generale SA inNew York.

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