How special is the US triple-A?

By Felix Salmon
April 23, 2009

A very good comment comes from dWj:

I had never heard until a year or two ago that U.S. Treasuries were even rated, though I have since read on occasion that it’s AAA, and have read the complaint that therefore other AAA rated bonds are rated as “as safe as treasuries”. (This is like saying that, because Einstein had a high school diploma, anyone with a high school diploma has been rated “as smart as Einstein”. The mechanism simply doesn’t make the distinction; it’s a bit of a leap to then say that the mechanism is asserting that the distinction doesn’t exist.)

It’s a good point, well made, but I, for one, have always been well aware of Treasury’s triple-A status, since I first started learning about bonds at the time that Newt Gingrich was refusing to raise the US debt ceiling and a US default was a serious possibility; a lot of discussion ensued, at the time, about the consequences of the US losing its triple-A rating. And since then, many sovereigns have lost their triple-A status, including Japan.

What’s more, Moody’s has indeed been creating distinctions within the triple-A band; the USA is stronger than Spain, but weaker than Finland, if that helps.

Of course more is meant by “risk free” than “zero credit risk” — the reason that Treasuries are considered risk-free and, say, IBRD bonds are not is not because the World Bank is more likely to default on its obligations than the US government. Rather, Treasuries are the most liquid debt instruments on the planet, and when you’re dealing with this kind of level of credit risk, illiquidity risk starts to become increasingly important.

But the fact is that all good things must come to an end — and that includes America’s triple-A credit rating. I have no idea when it will disappear, but empires fall, and so do triple-As. Even for the one country in the world capable of printing as many dollars as it needs.


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