Aug. 6 (Bloomberg) — Global investors can't get enough Americansecurities a year after Standard & Poor's Corp. downgraded U.S.government debt.

The dollar has outperformed its peers in the past 12 months,rising by 10 percent against a basket of six currencies. U.S.stocks have been the best performing equity market in terms ofdollars, with the Dow Jones Industrial Average advancing 14percent. Treasuries also have done better since the S&P actionlate on Aug. 5, 2011, returning 6.7 percent to investors comparedwith 6.1 percent for other government bonds.

“We're seeing negative data come in from a lot of parts of theworld,” said Kenneth Rogoff, a professor at Harvard University inCambridge, Massachusetts, and a former chief economist at theInternational Monetary Fund. “The rest of the world is looking atthe United States and saying, 'I wish we were the UnitedStates.'”

With the largest economy and deepest financial markets, the U.S.is seen as the safe haven for investors at a time when Europe isstruggling to contain its sovereign-debt crisis and Chinese growthis slowing. Low yields — 10-year Treasuries fell to a record 1.379percent on July 25 — show that most money managers have faith thegovernment will meet its obligations, in spite of S&P'sdecision to strip the securities of their AAA rating.

Token Gesture

The downgrade “was more a token gesture but didn't mean anythingto the credit quality of the U.S.,” said Paul Zemsky, the NewYork-based head of asset allocation for ING Investment Management,which oversees $160 billion.

S&P spokesman John Piecuch defended the company's action.

“Credit ratings are an opinion on relative risk of default, nota prediction of market behavior,” he said in an e- mail. “We begandowngrading Greece in 2004 and Italy in 2005 for example, but forseveral years markets continued to value their bonds nearly on parwith those of Germany.”

U.S. businesses are benefiting from the rush into Americansecurities by global investors. Fifteen of the top 20 companiesworldwide in terms of market capitalization are American, led byApple Inc. and Exxon Mobil Corp., according to data compiled byBloomberg. That's up from 11 a year ago. New to the top 20 from theU.S. are Coca-Cola Co., Wells Fargo & Co., Procter & GambleCo. and Pfizer Inc.

Safety Preferred

U.S. corporate bonds also reflect investors' preferencefor safety at a time of global economic trouble. Dollar-denominatedbonds of high-grade borrowers have returned 8.4 percent since Aug.5, 2011, exceeding the 7.8 percent return in the 12 months beforeS&P's downgrade, according to Bank of America Merrill Lynchindex data. Investment-grade corporate debt worldwide has returned7.6 percent in the past year.

Companies are taking advantage of the record low bond yields,selling $103 billion of debt last month, the busiest July onrecord, data compiled by Bloomberg show. Bristol-Myers Squibb Co.,Schlumberger Ltd. and Morgan Stanley all raised $2 billion each,the latter with its first fixed-rate 30-year debt in a decade.

“There was a lot of fear that the downgrade would result inhigher interest rates overall within the U.S. because of theperceived lack of fiscal responsibility,” said Thomas Chow, a moneymanager at Delaware Investments in Philadelphia with about $170billion under management, including $130 billion of fixed- incomeassets. “The reality of it is that this world is based more onrelative valuations.”

Better Performing

While the U.S. has slowed, it's still performed better than mostother advanced nations since the S&P move last year. Theeconomy expanded at an average annual pace of about 2.5 percentfrom the third quarter of 2011 through the first quarter of 2012.

That's double the rate of Germany and more than five times thatof France. It's also better than the U.K. and Italy, both of whichare mired in recessions. Among the Group of Seven industrialnations, only Canada and Japan, which has been recovering from theravages of the March 2011 earthquake and tsunami, grew more.

“The U.S. is the best-looking horse in the glue factory,” saidNariman Behravesh, chief economist in Lexington, Massachusetts, forIHS Inc. “We have our problems, but the rest of the developed worldhas far, far worse problems.”

While unemployment rose to 8.3 percent last month from 8.2percent in June, U.S. employers added 163,000 workers, the LaborDepartment reported Aug. 3, exceeding the 100,000 median estimateof economists in a Bloomberg survey.

Housing Revival

Housing, the epicenter of the financial crisis in the U.S., isshowing signs of life. Residential construction contributed 0.2percentage point to economic growth in the second quarter and 0.4point in the first, the biggest first-half role since 2005, beforethe 18-month recession that began December 2007.

Residential real-estate prices in 20 cities rose a seasonallyadjusted 0.9 percent in May from April, the largest increase inalmost three years, according to the S&P/Case- Shiller index ofproperty values.

“It really has turned what was a big headwind for us intosomething of a tailwind,” Karl Case, a professor emeritus atWellesley College in Massachusetts and co-creator of the index,told Tom Keene and Ken Prewitt on Bloomberg Radio's July 31“Surveillance.”

On its own, S&P's downgrade doesn't seem to have mattered,with Treasury yields down and the stock market up, said MohamedEl-Erian, chief executive officer of Pacific Investment ManagementCo. in Newport Beach, California. Even so, the market moves shouldbe seen against the backdrop of record monetary stimulus from theFederal Reserve, which has helped hold down yields, and the crisisin Europe, he said.

'Massive Outflows'

“There has been absolutely massive outflows out of Europeinto Switzerland and the U.S.,” said El-Erian, whose firm managesthe world's largest bond fund.

He said the U.S. is stuck with a sluggish economy, withgrowth during the next 12 months likely to be 1.5 percent. Europe'seconomy, though, probably will contract by that much over the sameperiod, he added.

S&P lowered the U.S. long-term credit rating to AA+last August after months of wrangling between President BarackObama and congressional Republicans over whether to raise thefederal- debt limit. While the impasse ended with Obama signing adebt- ceiling increase on Aug. 2, S&P downgraded the U.S threedays later, citing political gridlock in Washington and thenation's long-term fiscal challenges.

Justified Reduction

Sixty-seven percent of global investors polled by Bloomberg thefollowing month said the rating reduction was justified. U.S.investors were less supportive, with 57 percent approving, comparedwith about three-fourths of respondents in Europe and Asia,according to the survey of 1,031 Bloomberg subscribers.

Democrats and Republicans are heading for another showdown atthe end of the year, after the November election, when more than$600 billion in tax increases and spending cuts are slated to takeeffect in the absence of action by Congress.

Obama wants to raise taxes on households making $250,000or more, while keeping them on hold for everyone else. Republicanssay no taxes should go up.

“Both parties realize there is a fundamental mismatch betweentaxes and spending on entitlements,” such as Social Security andMedicare, said Bob Bixby, head of the Concord Coalition, whoseArlington, Virginia-based nonprofit group advocates balancedbudgets. “The next administration is going to have to deal withit.”

Budget Deficit

The White House has forecast a $1.2 trillion budget deficit forthe year ending Sept. 30, equivalent to 7.8 percent of grossdomestic product. Outside of 2010 and 2011, that would be thebiggest shortfall as a share of the economy since World War II. Thedeficit in 2011 was $1.3 trillion, or 8.7 percent of GDP.

S&P said in June that political and fiscal risks could leadto a second downgrade by 2014. While Moody's Investors Service andFitch Ratings have kept their top grades on the U.S., both have anegative outlook.

Not so global investors. In May, 46 percent of respondents in aBloomberg poll chose the U.S. as one of the markets with the mostpotential during the next year, up from 31 percent a yearearlier.

“We're overweight the U.S. relative to emerging markets andEurope in equities, and we keep thinking about when we should takethat position off but can't find a good reason to do so,” Zemskysaid.

More Flexible

U.S. companies are more flexible than their counterparts inEurope, with an ability to lay off workers and “get productivitygrowth out of what remains,” said Hayes Miller, who helps overseeabout $48 billion as head of asset allocation in North America atBaring Asset Management Inc.

“That underlying flexibility allows companies to continue togrow profits and run returns on equities that are in excess of whatthe European economies are able to do,” Boston-based Millersaid.

American banks also have made more progress than those in Europein rebuilding their balance sheets, he said.

“You can begin to see the return to normalcy for banks in theU.S. to have a capital structure to lend again to the privatesector,” Miller said.

Commercial and industrial loans have climbed about 15percent in the past year, in spite of concerns voiced by JPMorganChase & Co. Chief Executive Officer Jamie Dimon that creditwould be constricted by new regulations.

In terms of dollars, U.S. financial stocks have risenabout 10 percent since S&P's action, compared with declines ofabout 8 percent for Asia and 16 percent for Europe.

“It's quite an ironic downgrade,” said Brett Wander, chiefinvestment officer in San Francisco for fixed income at CharlesSchwab Investment Management Inc., which oversees about $200billion. “Investors will pay a significant premium for safety, andthere's probably no greater safe haven than the U.S., regardless ofthe rating that S&P assigns the country.”

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