US debt default fears grow as UK becomes safest haven for bondholders

July 28, 2011 –  LONDON – Fears that a debt default in the United States will trigger a dramatic loss of confidence in global markets drove interest rates on US Treasury bonds higher than those in the UK on Wednesday. In a significant boost for the chancellor, George Osborne, the UK was being seen as a safer haven for bond investors than the US during the spreading global sovereign debt crisis. The reversal of the traditional gap between US and UK government bonds came at the end of a turbulent day in the financial markets, as share prices fell and Greece was downgraded by another credit ratings agency. Wall Street was off 100 points in morning trading and the FTSE 100 closed more than 70 points lower. Even if the current deadlocked talks between Democrats and Republicans on Capitol Hill over raising the $14.3bn US debt ceiling make some progress, expectations are now mounting that the world’s largest economy will be stripped of its coveted triple A debt rating. Brian Barry, fixed income analyst at Evolution Securities, which reckons the ratings downgrade could come as soon as September, said: “You are staring into the unknown.” Some economists reckon the outcome can be handled by the market, but others warn it could be catastrophic. A deal has to be struck before next Tuesday, but the repercussions of failure were becoming clear when the yield – or interest rate – on 10-year UK government bonds, known as gilts, stood at 2.98% while the equivalent interest rate on US treasuries was 3%. –Guardian UK