At long last, after months of warnings, leaks, hand wringing, and speculation, Standard and Poor’s has at last downgraded US Treasury bonds a notch to AA+. The change was the most telegraphed ratings change in history.
You can bet this weekend saw a flurry of emergency board meetings across the country. Many institutions are only permitted to own AAA debt securities, and rules will need to be changed quickly to permit their continued residence in institutional portfolios.
I don’t expect to see any major market impact, beyond a day or two. The fact is that America’s financial health has been sliding down hill for the last 30 years. Standard & Poor’s should have made the downgrade during 1980-82, when Ronald Reagans quadrupled the national debt, from $1 trillion to $4 trillion.
It should have downgraded Uncle Sam’s debt a second time when George W. Bush doubled it again from $5 trillion to $10.5 trillion. It turns out that cutting taxes while starting two new wars is not a great budget balancing strategy. If any other country were issuing bonds with this balance sheet, I reckon they would catch a single “A” rating at best.
I suspect that the timing of the downgrade now was more of a political than analytical decision. It’s not that Standard & Poor’s has any great credibility here. It totally missed the 2008 financial collapse. During the credit boom, it handed out triple “A” ratings with reckless abandon to subprime securities that were clearly junk. To this day, I am amazed that the shoddy practices of the ratings agencies didn’t get the principals sued out of existence or put in jail.
Sovereign debt downgrades from triple “A” are not without precedent. In every case the change turned out to be a deep lagging indicator, a classic case of closing the barn door after the horses have bolted. One need look no further than Japan, whose downgrade was greeted with no more than a yawn.
Today, the Japanese government can borrow all it wants at 1.01% for ten years, and a pitiful 1.90% for 30 years, less than half of what the US government currently pays. The true irony here is that Standard & Poor’s made its move the day after ten year Treasury bond yields matched a 40 year low at 2.35%.
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It may turn out that America’s long heralded debt downgrade is the first boring thing that happened this month.
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By. Mad Hedge Fund Trader
