The US triple-A: Nothing to worry about

By Felix Salmon
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.

Comments
11 comments so far

Thank you. Very sensible. We are so poorly served by our sorry media.

“number of people buying Treasuries because S&P says that they’re triple-A rated is exactly zero.”

Then how could his comment matter to the market, or even be correct. Presumably, some people bought and sold today. They had, well, I’m assuming that they had, reasons for their actions. How can they fear the US losing something that doesn’t matter?

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

Maybe it’s his Hermes shirts, whatever they are. I don’t see them at Goodwill.

Felix tells us ratings don’t matter.

Bill Gross thinks otherwise.

So does Geithner:

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.

the mere mention of this as a credible headline is enough.

Posted by Mike | Report as abusive

the mere fact that this is being discused is enough.

Posted by Mike | Report as abusive

There’s about $32+ trillion of rated debt outstanding. (of which $2 trillion is mortgage-backed debt, of which a relatively small percentage has actually defaulted — check my numbers) so the rating agencies have gotten most of it right by any measure, so stop exagerating and stick to the facts. The ratings agency’s country ratings have been quite accurate.

Posted by Flyboy | Report as abusive

“The US triple-A: Nothing to worry about”
I can guarantee you that it matters a LOT that the US or the UK keep the triple-A. This has huge implications for the banking system as the risk-weighting of banking assets automatically jumps if the sovereign rating moves down to A+

I dont think this is as silly as you think. The contingent liabilities the state has taken on in its effort to stem the crisis, and its effort to subordinate its capital to the senior liabilities of the banking system means that the credit position we assumed for treasuries 5 yrs ago is not the same. Its a lot worse.

Posted by dazedandconfused | Report as abusive

What a ridiculous post. Reuters should quit this blogging stuff else they will lose credibility as a news services agency. Looking at a one day one percent drop in the market is not the way to look at the slow crash we have had since october of last year. And don’t be so sure about liquidity of US treasury. Just because there is plenty of supply in the pipeline doesn’t mean there will be buyers. What is liquid one day can be illiquid overnight. Look at the securitized markets, and no there is nothing special about the US treasury anymore as we are broke as far as the eye can see. Only buyers soon will be the Fed.

Posted by Joe | Report as abusive

A sorry, sophmoric article. You say ratings don’t matter? I disagree–they are a backward looking indicator.

They don’t matter to people who want a prospective understanding of credit health. But when you’ve been downgraded (or on watch), the rating agency is capitulating to the truth everyone else already knows. They take this “conservative” approach, and help no one with their credit analysis.

So yes, the downgrades matter: it’s the last nail in the coffin of once-healthy credit.

Posted by Richard McCallister | Report as abusive

Hey boys & girls out there in radioland, I just want to remind you that all this hyper-spending by the radical left that is now running Washington, et al, WILL be paid for eventually – by Inflation & Higher Taxes! The public will have to guess how much of each is required and plan their investments accordingly. I say guess because nobody in the Obama-Geithner-Bernanke gang has a clue either.

Posted by Bud Woods | Report as abusive
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