Last Friday evening, after the markets closed, S&P (one of the big three bond rating agencies) downgraded the rating of the US Treasury?s debt from AAA to AA+. ?This is the first time ever that S&P has downgraded us below AAA. ?Ouch!
So what does this mean?
That first panicked thought may lead someone to think that the world?s investors would sell off US debt and buy anything else. ?So, we were left biting our nails over the weekend waiting for this morning?s Armageddon. ?Guess what? It didn?t happen…at least not for the bond market. ?Why not?
It wasn?t a huge surprise to major bond investors that this move happened. ?The timing may have been sooner than expected, but S&P had been quite vocal about this for a while now. They didn?t provide any new information and their concerns are, frankly, the same concerns everyone has known about for a while (so the market has already priced them accordingly).
There are recent concerns that the US and Europe may both be stagnating and not recovering like everyone had hoped. ?This causes investors to sell stocks and buy something safer, like bonds, ?which is what happened last week. ?Today?s sell off is mostly panic and a continuation of the ?sky is falling? reactions of last week. ?So, the result of a bond downgrade ended up in stocks selling off and bonds profiting, go figure.
Nowhere to Go
US Treasury debt is considered the safest investment in the world. ?All debt is essentially judged against it. ?The drop in rating didn?t change that perception overnight, but more importantly, it didn?t make any other government?s debt any stronger. ?Last week?s stock sell off was primarily due to perceived economic weakness and a debt problem in Europe. ?Thus, investors looked for safety and bought US bonds. ?That caused US Treasury and mortgage rates to lower (rates go down when buying & prices go up). ?Well, since the problem was debt concerns in Europe, investors certainly aren?t going to sell their US bonds to buy European ones. ?Some bought gold (I?ll hold off on any comments about that bubble). ?All in all, US debt is still considered the safest investment in the world. ?So for now, after Friday?s move, the US bond market will act in the same manner that it has all along.
Long Term Implications
It?s not much of a secret that the US needs to right its financial ship. ?The political showboating and bickering by our politicians surely doesn?t help make this happen, nor does it make any investor confident that we have a stable, implementable plan. ?The bottom line is that we need to increase tax revenue and decrease spending or else the other two major players and investors of the world will downgrade us too. ?I?ll leave it to Washington to figure out how to make that happen…or maybe that?s a mistake.