Downgraded
by wjw on August 9, 2011
So now S&P has downgraded US government bonds from AAA to AA+. The result is that people are stampeding to buy them.
Perhaps they remember that it was the ratings agencies who gave AAA ratings to sub-prime loans, and S&P who rated Ireland’s debt AAA until April Fool’s Day, 2009, and Spain as AAA until January 2009. Maybe they remember how S&P rated Iceland’s debt at AA+.
Or perhaps they noticed that S&P made a 2 trillion dollar error in their calculations. (Two trillion is the cost of two Iraq wars, for those of you still counting.)
Anyway, there’s a pretty good case for betting against S&P, and lots of savvy investors are doing exactly that.
Anyway, there’s a pretty good case for betting against S&P, and lots of savvy investors are doing exactly that.
Not so much. First, S&P only downgraded long-term risk; the shorter term T bills are still ranked in the lowest risk category.
Second, the money has been moving out of equities and into T’s; this suggests that these top-ranked short-term Treasuries are less risky than current equities. Given the way things have been recently, that’s not exactly a ringing endorsement of short maturity Treasuries.
Third, Treasuries work differently than, say, stocks. Buying a short term Treasury means you guarantee some small but predictable yield; this puts a definite bottom on the down-side risk, assuming the US doesn’t actually default. Since the risk of an actual default is now, and has been, vanishingly small for at least years into the future — even if the debt ceiling had not passed, the US has plenty of cash flow to pay interest — this makes Treasuries a good place to ensure you have a predictable yield, albeit a small one as you’d expect from the low risk.
Well yes. This still doesn’t explain to me why S&P is right.
I don’t know how an entity THAT CAN PRINT MONEY can default on its debts.
Comments on this entry are closed.