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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Comments
5 comments so far

Given the ratings companies’ huge failures in the past few years, why does anybody still attach any credence to them now?

Posted by KenG | Report as abusive

Felix – on a tangential topic, I would be interested to see you address the issue of CA munis. I live in CA so this is self interest, hoping for enlightenment.

Given that CA now has the lowest credit rating of all the states, does that make the high rates CA is offering in recent auctions something to avoid, owing to the risk of default, or something to cherish on the lines of ‘too big to fail’.

To make it less CA-centric, the question applies broadly to bonds in general.

Posted by Thomas Pindelski | Report as abusive

FS: “Even for the one country in the world capable of printing as many dollars as it needs.”

There above lies the fallacy in your reasoning.

If the Central Bank of a nation has the authority to print as much money as it wants, then the Treasury will not default in payment of the interest on its bonds.

What can change is the bond’s yield, since its resale price will not be the same as it purchase price if default is a menace. Even then, however, it is not sure that the yield will suffer greatly.

Posted by Lafayette | Report as abusive

I agree with KenG that the ratings agencies cannot be trusted. Instead, I think we should be looking at the cost of credit default swaps (CDSs). My understanding is that the cost of U.S. government CDSs has risen considerably over the last year.

I have two questions:

1) Is there a free place on the web to look up CDS prices?

2) Does the U.S. government actually pay Moody’s, S&P and Fitch for its AAA rating?

Posted by David Levner | Report as abusive

Triple A rating is meaningless if inflation wipes out earnings. Eventually investors will move away. Risk taking is the only way to increase wealth when investing. Now to the real matter.

The character of those in the industry is of the greatest importance. Trust is not an assurance of prosperity. Rather it is the confidence in knowing you are receiving all the information available and that it is correct. This level of transparency simply is not present.

Corruption prevails all way to the highest levels of most business’. I would submit the same is true for governments. The more we look for technical solutions to our problems, the more we look past the fundamental issue. Consumers should seek out those who act in good faith and have the reputation to back it up. Otherwise don’t consume. I suspect this very principal is in no small measure contributing to our economic catastrophe. Unfortunately this does nothing to alleviate suffering and hardship that this calamity has brought upon millions.

I find no end to my distress over the moral decay so many in this nation suffer from.

Posted by Anubis | Report as abusive
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