Any selloff in Treasuries and the dollar following Standard& Poor's first ever downgrade of the U.S. from AAA is likely tobe short-lived amid slowing economic growth and Europe's debtcrisis, according to Wall Street banks.

JPMorgan Chase & Co. said a drop in Treasuries from theratings cut is unlikely to be “sustained,” while Citigroup Inc.said dollar selling isn't forecast to be entrenched. Barclays Plcsaid the downgrade shouldn't be “significant,” and UBS AG said thetop ranking for U.S. short-term debt will prevent money funds frombeing forced to react.

For all the handwringing over the credit-rating cut, bondinvestors from Wall Street banks that trade directly with theFederal Reserve to policy makers in China and Russia are likely toretain their holding of Treasuries as they see few alternatives tothe world's deepest and most liquid market. The dollar remains theworld's reserve currency even as S&P cut the U.S. one level toAA+ while keeping the outlook at “negative” on Aug. 5, citing thepolitical failure to reduce record deficits while Moody's InvestorsService and Fitch Ratings affirmed their AAA credit ratings for theU.S. on Aug. 2.

“The markets are pretty well braced and have priced this in,”said Laura LaRosa, director of fixed income at Philadelphia-basedGlenmede, which oversees $20 billion. “Certainty, we would not cutour Treasury holdings on the S&P downgrade. We don't thinkthere's going to be a huge violent swing.”

Buffett, Greenspan
Billionaire WarrenBuffett said in an interview with Betty Liu at Bloomberg Televisionthat S&P erred when it lowered the U.S. credit rating andreiterated his view that the economy will avoid its secondrecession in three years. The nation merits a “quadruple A” rating,Buffett, 80, said Aug. 6.

Former Fed Chairman Alan Greenspan, speaking on NBC's “Meet thePress,” said that U.S. government bonds are safe investments. “Verymuch so,” he said Aug. 7.

The cost to insure U.S. debt against default is less than thatof AAA rated Germany, France, Australia and the U.K., according todata provided by CMA, which is owned by CME Group Inc. and compilesprices quoted by dealers in the privately negotiated market.

Default Protection
Credit-default swapsthat protect against default on U.S. notes for five years fell 11percent last week to 55 basis points, before rising to 58.5 basispoints today, CMA data show. That compares with an increase lastweek of 15.6 percent to 74 for swaps linked to Germany, an 18.2percent climb to 144 for France, a 21.5 percent rise to 69 forAustralia and a 4.5 percent weekly increase to 77 for U.K.government securities.

Yields on 10-year Treasury notes dropped 24 basis points lastweek or 0.24 percentage point, to 2.56 percent after falling as lowas 2.33 percent on Aug. 5, according to Bloomberg Bond Traderprices amid signs of stalled economic growth and a wideningsovereign-debt crisis in Europe. The yield was at 2.48 percenttoday.

The two-year U.S. note yield dropped seven basis points to 0.29percent last week and was at 0.25 percent today. It touched arecord 0.2527 percent on Aug. 4.

Treasuries have returned 5.29 percent this year, according toBank of America Merrill Lynch data, outperforming the 4.63 percentdecline in the Standard & Poor's 500 Index.

JPMorgan said 10-Treasury yields will likely increase to 3percent by the end of the year, compared with an earlier forecastof 3.5 percent, on a “poorer growth outlook,” according to an Aug.5 report from analysts led by Terry Belton, global head offixed-income and foreign-exchange research.

Investor Comfort
“We do not anticipateforced selling of U.S. Treasuries from any significant investorbase,” Barclays analysts Ajay Rajadhyaksha and Anshul Pradhan wroteAug. 6 in a research report. “U.S. Treasuries remain theflight-to-quality asset class of choice, and we do not believeS&P's action will change that in investors' minds.”

S&P lowered the U.S. rating as it becomes less confidentCongress will end Bush-era tax cuts or tackle entitlements. Theranking may be cut to AA within two years if spending reductionsare lower than agreed to, interest rates rise or “new fiscalpressures” result in higher general government debt, the NewYork-based firm said.

“The downgrade reflects our opinion that the fiscalconsolidation plan that Congress and the Administration recentlyagreed to falls short of what, in our view, would be necessary tostabilize the government's medium-term debt dynamics,” S&P saidin a statement late on Aug. 5 after markets closed.

Ratings Review
While Moody's and Fitchaffirmed the top AAA rating for the U.S., they said downgrades arepossible if lawmakers fail to enact debt reduction measures and theeconomy weakens.

Lawmakers agreed on Aug. 2 to raise the nation's $14.3 trilliondebt ceiling and put in place a plan to enforce $2.4 trillion inspending reductions over the next 10 years, less than the $4trillion S&P had said it preferred.

On a conference call on Aug. 6 with reporters, S&P analystsDavid Beers and John Chambers said that in their analysis, the“extremely difficult” political discussions in Washington over howto reduce the more than $1 trillion budget deficit carried moreweight in their decision than the nation's outstanding debt. Itsaid the talks weren't “consistent” with a AAA rating.

Long-Term View
There may be “long-termimplications” if the markets agree with S&P that the U.S. hasbecome less creditworthy, eroding its role as the world's reservecurrency, Barclays said. Borrowing costs may rise about 25 basispoints and spur investors to “increase diversification away” fromthe dollar.

Asian investors are likely to retain their Treasuries holdingsfor now, with options limited by the region's foreign-exchange ratepolicies. Japan, the second-largest international investor inAmerican government debt, sees no problem with trust in thesecurities, a Japanese government official said on condition ofanonymity. Russia said the one-step cut “can be ignored.”

Policy makers from China to Japan to Southeast Asia are lured toTreasuries as a result of efforts to stem gains in their currenciesagainst the dollar, which would impair export competitiveness.China has accumulated $1.16 trillion in the securities and thenation's official Xinhua News Agency said in a commentary that theU.S. must cure its “addiction” to borrowing.

No Sale
“Foreign official institutions arelikely to be particularly loath to sell Treasuries,” Citigroupanalysts Todd Elmer, Steve Englander and Greg Anderson wrote in areport. “Foreign official institutions represent the single largestholders of Treasuries, which means they are most exposed to theratings downgrade, but politically they are unlikely to want tointroduce additional volatility into the market and it would bedifficult for them to join in with private sector sellers of U.S.securities.”

The dollar rallied last week versus 15 of its 16 most-tradedcounterparts as concern the world's largest economy is stalling andEurope's debt crisis is worsening damped demand for higher-riskassets. The greenback was up versus 12 of its 16 today.

Italian Prime Minister Silvio Berlusconi vowed the nation willaccelerate financial reforms. The move came before the EuropeanCentral Bank was said to be buying Italian and Spanish governmentbonds today to help stave off the debt crisis.

The committee of bond dealers and investors that advises theU.S. Treasury said the dollar's status as the world's reservecurrency “appears to be slipping” in quarterly feedback presentedto the government on Aug. 3.

Reserve Currency
The U.S. currency'sportion of global currency reserves dropped to 60.7 percent in theperiod ended March 31, from a peak of 72.7 percent in 2001, datafrom the International Monetary Fund in Washington show.

“The idea of a reserve currency is that it is built on strength,not typically that it is 'best among poor choices',” page 35 of thepresentation made by one member of the Treasury Borrowing AdvisoryCommittee, which includes representatives from firms ranging fromGoldman Sachs Group Inc. to Pacific Investment Management Co. “Thefact that there are not currently viable alternatives to the U.S.dollar is a hollow victory and perhaps portends a deterioratingfate.”

Members of the TBAC, as the committee is known, which met Aug. 2in Washington, also discussed the implications of a downgrade ofthe U.S. sovereign credit rating. “None of the members thought thata downgrade was imminent,” according to minutes of the meetingreleased by the Treasury.

S&P Top
S&P gives 18 sovereignentities its top ranking, including Australia, Hong Kong and theIsle of Man, according to a July report. The U.K. which isestimated to have debt to GDP this year of 80 percent, 6 percentagepoints higher than the U.S., also has the top credit grade. Incontrast with the U.S., its net public debt is forecast to declineeither before or by 2015, S&P said in the statementyesterday.

New Zealand is the only country other than the U.S. that has aAA+ rating from S&P and an Aaa grade from Moody's. Belgium hasan equivalent AA+ grade from S&P, Moody's and Fitch.

The downgrade by S&P “may well raise questions about othermembers of the dwindling AAA club,” Mohamed El-Erian, the NewportBeach, California-based chief executive officer and co- chiefinvestment officer at Pimco, the world's largest manager of bondfunds, wrote in an e-mail.

“Investors should be cautiously positioned as the global economyand markets face major uncertainties,” El-Erian wrote. “Thedowngrade will be a further headwind to growth and job creation inthe U.S.”

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