Take that, S&P! Rates on Treasuries stay low
August 8th, 2011
01:45 PM ET

Take that, S&P! Rates on Treasuries stay low

For the first time in history, the United States no longer deserves its cherished AAA-status - at least according to Standard & Poor's. So are investors dumping their Treasuries? Far from it.

In fact, investors rushed to buy Treasuries Monday, the first day investors could react to Standard & Poor's downgrade. The buying drove yields down, to 2.43% on the 10-year Treasury, from 2.56% late Friday.

The buying is being driven by rising fear and uncertainty: What would the impact of the downgrade be? How will the European debt crisis play out? And will the U.S. fall back into recession?

In such uncertain times, investors typically flee risky assets such as stocks and pile into perceived safe havens, which for now include U.S. Treasuries.

"The U.S. Treasury sector remains the largest and most liquid fixed-income market in the world with the greatest degree of price transparency and few genuine alternatives," said BlackRock, the world's largest money manager, in a statement.

"While a time may come when the credit risk-free status of Treasury bonds is diminished by continued policy missteps, we do not believe that the S&P downgrade signals that this moment has come now," BlackRock said.

The 10-year Treasury yield is now at its lowest level since October 2010. The yields on other Treasuries also sank.

China, the largest holder of U.S. debt with more than $1 trillion in U.S. Treasuries, used S&P's rating cut as an opportunity to demand that Washington get its finances in order and to question the primacy of the dollar. Still, the country has no plans to dump U.S. debt anytime soon.

Furthermore, it is also doubtful that individual investors will reduce their Treasury holdings.

"Very few private investors will have to make any changes to their holdings either, including U.S. money market mutual funds, because the downgrade applies only to long-term Treasuries," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a note to clients.

Plus, Shepherdson added, U.S. debt remains in perfect standing with the other two major rating agencies, Moody's Investor Services and Fitch Ratings.

"We don't care what S&P thinks, about Treasuries or anything else," he said. "Its appalling record over the last few years, during both the mortgage blow-up and the sovereign debt crisis in Europe, speaks volumes."

Read the rest over at CNNMoney.

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Topics: Economy • United States

soundoff (5 Responses)
  1. Noms

    "We don't care what S&P thinks, about Treasuries or anything else.' Just about sums up the public opinion as well.

    Still, it seems like the market is reacting with lots of volatility.

    Cool graphic on how this scenario is playing out - https://www.hiddenlevers.com/hl/scenario?scenid=952596

    August 8, 2011 at 2:09 pm |
  2. j. von hettlingen

    S & P's downgrade has triggered a psychological effect on the world finance market rather than a physical one. There was at first panic, then people have come round and decided to stick to the U.S. treasuries.

    August 9, 2011 at 6:55 am |
  3. Ron

    S&P is showing it's true colors again in bowing to powers that be to increase bank and investment banker revenue by down grading IT'S US credit rating. Too much of our country's monthly's are currently interest only. PTB want interest rates to rise,

    August 10, 2011 at 7:35 am |

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