The United States has lost its gold-plated triple-A rating — in the eyes of credit traders, at least

Colin Barr

Not a vote of confidence

U.S. sovereign debt was the third-worst performer in a closely watched derivatives market during the third quarter, CMA said Tuesday in its quarterly review of global sovereign credit risk.

The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm said.

That puts the United States’ third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.

What’s  more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory.

Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody’s.  But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam.

“You can see an indication of concern about the easing course the Fed is likely to continue on,” said Sean Egan, who runs the Egan-Jones credit rating agency in Haverford, Pa. “There’s a number of items that are going to be difficult to reverse as we get down that road, starting with the dramatic underfunding of state pension funds.”

The shift comes at a head-spinning time for the U.S. economy. The government has run two straight trillion-dollar-plus budget deficits, with more to come. Yet Treasury bonds are trading at record-low yields, reflecting questions about the economic outlook.

Meanwhile, the Federal Reserve is considering another round of major asset purchases in a policy observers have dubbed QE2, for the central bank’s second attempt at quantitative easing – a bid to boost economic activity by expanding the size of the Fed’s balance sheet….

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