US BONDS:THE $9.4 TRILLION (€6.6 trillion) US government bond market is proving US Federal Reserve chairman Ben Bernanke matters more than Standard and Poor's (S&P).

Even though the US is poised to run a budget deficit of $1.6 trillion and S&P removed the nation’s AAA rating, investors are lending the government money at record low rates.

Five days after the first downgrade to AA+, the US treasury sold $24 billion of 10-year notes to yield 2.14 per cent. When the US was running budget surpluses from 1998 to 2001, treasuries of similar maturity yielded an average of 5.48 per cent.

For all the conflict between Congress and US president Barack Obama’s administration over the debt ceiling and deficits, bond investors say they are more influenced by interest rates, the economy and inflation.

Because of the dollar’s preeminent place as the world’s reserve currency, the US enjoys a “funding advantage”, S&P said in its August 5th report.

“As long as I’ve been watching the market there’s been very little correlation between fiscal activity and interest rates,” said Jay Mueller, a senior money manager at Wells Fargo Capital Management. Mr Bernanke boosted debt markets yesterday when the Fed pledged to keep its target rate for overnight loans between banks at a record low of 0 to 0.25 per cent at least until mid-2013 to revive growth that it described as “considerably slower” than anticipated.

GDP rose at a 1.3 per cent annual rate in the second quarter, after expanding 0.4 per cent in the previous three-month period, which was the weakest since the recovery began in June 2009.

Fed policymakers have scope to leave rates unchanged even with gold trading at an all-time high and food costs near records because an unemployment rate above 9 per cent is keeping inflation in check.

Yields on 10-year treasuries fell to a record low of 2.0346 per cent yesterday. – (Bloomberg)