S&P put the US rating on negative watch “owing to the dynamics of the political debate on the debt ceiling’. The agency said there is “at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days”. At Fed Chairman Bernanke’s second day of testimony he floated contingency plans around the debt ceiling issue, such as the Fed itself buying up defaulted securities, though he added that any such decision would need to be taken by the FOMC as a whole and he expressed doubts over its efficacy on preventing prohibitive gains in yields. Meanwhile, the White House reported that $1.5 trn in cuts were agreed upon and an additional $200 bn could be found, though we believe these figures are insufficient to avoid another vote next year. Continue reading →