The US triple-A: Nothing to worry about

May 21, 2009

Bill Gross seems to have caused a bit of an uproar with his off-the-cuff comment to Reuters:

Asked what is driving the market declines, Gross told Reuters via email that investors fear the U.S. is “going the way of the U.K. — losing AAA rating which affects all financial assets and the dollar.”

On the one hand, as ex post explanations for market declines go, this one’s quite good: if true, it helps explains why both stocks and bonds are going down on the same day. What’s more, it tidily fits in to a news story — that S&P has downgraded the UK’s triple-A outlook — and journalists love any explanation for a market move which makes it seem that it’s some predictable result of an event in the news.

But let’s get some perspective here. The Dow and the S&P 500 closed down 1.5% and 1.9% respectively, which by recent standards is a perfectly normal move, well within the range of what you’d expect on any given day. What’s more, S&P putting the UK on watch for a possible downgrade is a decision prompted by economic fundamentals. Any such move with the US, by contrast, would be entirely political, and in any event would say much more about S&P than it did about Treasuries.

The most important thing to remember here, however, is that ratings agencies don’t matter any more. They lost their credibility when structured finance blew up, and the number of people buying Treasuries because S&P says that they’re triple-A rated is exactly zero.

There are lots of triple-A rated securities; people buy Treasuries because they’re liquid. The US triple-A may or may not disappear at some point, but if and when that happens it’ll be a lagging indicator, and there will already be a select group of alternative securities which are trading at lower yields in dollars. So long as Treasuries have the lowest yields in the dollar-denominated world, they will retain their triple-A, and there are much more important things to worry about.


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