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* I try to ignore national politics no matter what, but this is a fascinating story…
Benchmark 10-year Treasury note yields fell to their lowest levels since February 2009 on Monday, after a U.S. credit dowgrade sparked broad risk aversion and added to the appeal of U.S. government debt.
The notes rose more than 2 points in price, with yields falling as low as 2.33 percent, the lowest rate in 2 1/2 years.
Translation: S&P downgraded US government debt on Friday. Supposedly in reaction, the stock market fell hard on Monday and spooked investors rushed to put their money in… US government debt.
Maybe Illinois should ask S&P to downgrade its bonds again. Just kidding… kinda.
…Adding… Sun-Times…
The state of Illinois has not yet been told of any change in its rating, said Kelly Kraft, Gov. Quinn’s budget spokeswoman. Illinois’ current rating from S&P is an A-Plus with a negative outlook.
Speculation is that, if S&P downgrades the 50 states’ ratings, Illinois overall rating would drop to A2-Minus, which could mean a one-half of 1 percentage point increase in interest rate payments on future bond issues. For a $2 billion to $3 billion capital plan bond issue such as the state is planning this fall, such an increase would cost hundreds of millions more in interest.
posted by Rich Miller
Monday, Aug 8, 11 @ 4:08 pm
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I won’t pretend to know anything about the markets but might we be seeing a bunch of profit taking as it relates to the DOW and then that money being invested in to US debt?
Comment by wndycty Monday, Aug 8, 11 @ 4:13 pm
Can’t wait for the Rutherford newser where he’ll tell us how he stayed up all night overseeing an investment strategy that maximized Monday’s market change and netted Illinois $37.83 in profits.
Comment by Michelle Flaherty Monday, Aug 8, 11 @ 4:18 pm
I thought the most interesting part of the S&P downgrade (aside from the bad math) was the notion that the action was taken not because the US can’t meet its financial obligations, but because S&P doesn’t think the political will exists to pay the bills.
The Tea Party Republicans have said no to new revenue. S&P thinks they will prevail, thus the downgrade. At what point do rational Republicans take their party back? How much worse does it have to get before the adults send the children off to bed without their supper?
Fortunately this has already played out in Illinois. But the stakes are much higher in Washington. We have a revenue problem, and a slight (by comparison) spending problem. It will take both revenue increases and smart spending cuts to get us back on track.
Why must this simple fact be so hard for the Tea Party to understand?
Comment by 47th Ward Monday, Aug 8, 11 @ 4:23 pm
David Frum is a rational Republican who does “get it”
= = = The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. As I write, the US government can borrow money for 10 years at about 2.3% and for 2 years at under one quarter of a point. The market wants to buy, buy, buy US debt […]
What the market wants to sell are stocks: ie, claims on the future earnings of private-sector companies. In other words, the market is saying: We fear recession and deflation. The Washington consensus is that we need to fight debt and inflation. It’s utterly upside down, utterly perverse. = = =
http://www.frumforum.com/the-downgrade-rally
Comment by Bill White Monday, Aug 8, 11 @ 4:36 pm
From Krugman:
August 8, 2011, 12:34 pm
It’s a Growth Scare
FTalphaville has been saying this all day, and it’s right. The action in the markets looks nothing like worries about US solvency; it looks exactly like what you expect to see when markets suddenly realize that the economy’s growth prospects look terrible.
One more note: inflation expectations are plunging:
Truly, our public discourse has been entirely about problems we don’t have, at the expense of dealing with the problems we do have.
Comment by too difficult Monday, Aug 8, 11 @ 4:36 pm
The Atlantic has an article headline today that about sums it up:
“Forget the Downgrade, Panic About Everything Else”
Comment by Don't Worry, Be Happy Monday, Aug 8, 11 @ 4:38 pm
===our public discourse has been entirely about problems we don’t have, at the expense of dealing with the problems we do have.===
DC has been that way for years. Unfortunately, the times are so dire that we can no longer afford that luxury.
Comment by Rich Miller Monday, Aug 8, 11 @ 4:50 pm
Without two to tango, there is no dance.
Seems that S&P may have recognized that the left side of the aisle is so addicted to spending that there is no hope of meaningful spending reform. They further realize that there isn’t sufficient money that would be available from new taxation to close that gulf. Looks like simple math to me.
Time to look in the mirror about the budget problems. Casting stones at the Tea Party or Republicans won’t help solve the problem.
Comment by Plutocrat03 Monday, Aug 8, 11 @ 4:50 pm
@ Plutocrat03
=== Seems that S&P may have recognized that the left side of the aisle is so addicted to spending that there is no hope of meaningful spending reform. ===
Obama offered $3 trillion in spending cuts if Boehner would agree to $1 trillion in new revenue.
Boehner said “No”
Also, if your interpretation was true, no one would be buying Treasuries.
Comment by Bill White Monday, Aug 8, 11 @ 4:54 pm
The bonding houses and investment firms can’t stop sucking on Uncle Sam’s teet. And Rich, please don’t delete that. I am not trying to be profane but rather make a point about the interesting federal-private partnership.
Comment by Team Sleep Monday, Aug 8, 11 @ 4:55 pm
47th
no we have a big spending problem. If we start spending what we bring in it will help. But for some reason our current president doesnt get it.(the last several havent)Look at the amount of debt that we have added in the last 2 1/2 years. Reforming the tax code to make it simpler and close some loop holes would help, I could even live with a compromise between the current tax rate and the rates before the Bush tax cuts. But to downplay the spending habits of this goverment is wrong.
Comment by fed up Monday, Aug 8, 11 @ 4:58 pm
It is perfectly consistent that people are putting money into US bonds. The ratings firms, S&P among them, are also looking at the sovereign debt of many other countries, and are talking about more downgrades. Right now, there is talk in the EU about a bailout of both Italy and Spain. Were that to occur, we’re talking about numbers that make the TARP look small. There is also a move afoot to downgrade Fannie, Freddie, and Ginnie, and to look at the states again.
But if you want to put your money into Swiss or Chinese bonds, go crazy!
47th,
I think you will soon see amazing levels of conservative support for closing loopholes in the tax structure. Good by ethanol subsidies, with the added benefit (beside revenue increases) of we stop burning our food.
Bill White,
Frum is a squish.
Comment by Cincinnatus Monday, Aug 8, 11 @ 5:00 pm
=== Seems that S&P may have recognized that the left side of the aisle is so addicted to spending that there is no hope of meaningful spending reform. ===
Comments like this are the very problem they are pointing to. It is not about the pointing fingers at the other side but being willing to make a deal that is in the best interest of the greater good, even if that means compromising. THAT is the problem, and folks on both the left and right are guilty.
Comment by Montrose Monday, Aug 8, 11 @ 5:01 pm
“It is perfectly consistent that people are putting money into US bonds. The ratings firms, S&P among them, are also looking at the sovereign debt of many other countries, and are talking about more downgrades.”
That’s the story right there.
Investors are looking for literally ANYTHING that looks safe (safer) that whatever else is out there. And there’s next to nothing out there.
Treasuries have already been downgraded. So there’s already been a hit on them. But sovereign debt (say, France, Japan, or Belgium, or US State debt) has yet to be ‘adjusted’ - anybody really think France is going to stay a AAA when the US is AA+??
What investor in their right mind would front run the market buying sovereign debt that is due to be immediately downgraded, thereby guaranteeing themselves a loss once the downgrade occurs.
What this downgrade to AA+ is going to do is to really hit the States and the muni market. Not so much existing debt - unless they have some special terms where if a downgrade occurs, the bond repayment terms change (then, yeah - that’s bad!). But for new bonded indebtedness issues, or products in the pipeline, well, that’s likely to be brutal.
The real problem IMO is that this pending downgrade means that a whole lot of muni issuers are going to get put under the microscope, and the view’s going to be downright UGLY in a whole lot of places.
We’re likely to find out that it’s not a “Bipartisanship Issue” as much as it is a “dry rot” issue with a lot of the Muni issuers.
Meredith Whitney, wasn’t wrong, just early:
“On December 19, 2010, Whitney stated that between fifty and a hundred counties, cities, and towns in the United States would have “significant” municipal bond defaults starting in 2011, totaling “hundreds of billions” of dollars in losses. She predicted this during her appearance on the broadcast of the CBS program 60 Minutes. Since the record amount of money lost in one year through municipal bond defaults is $8.2 billion, Ms. Whitney’s comments about hundreds of billions in losses drew a great deal of attention, much of it critical.[6] As of June 2011[update], her prediction had yet to materialize.[7]”
http://en.wikipedia.org/wiki/Meredith_Whitney
Comment by Judgment Day Monday, Aug 8, 11 @ 5:33 pm
This entire episode smacks of having been engineered specifically for the giant investment bankers’ benefit. Crash the t-bills and then buy them up for cheap. Would any of this have happened, if the Wall Street lobby didn’t buy off Congress as they tried to enact reforms and more regulation of the investment industry in the wake of the toxic mortgage melt-down?
Hey, Mortimer, where’s Beakes with that Orange Juice report?
Comment by Newsclown Monday, Aug 8, 11 @ 6:23 pm
Yes 47th, it is all a revenue problem, not a spending problem. It is also the fault of the republicans and the “terrorist” tea party. Keep telling yourself that, it is very helpful. Seriously, you don’t think we have a spending problem on the national and state level? You can only raise so much revenue during a weak economy, at some point you need to cut the entitlement programs and not spend more than what you have coming in.
Comment by Holdingontomywallet Monday, Aug 8, 11 @ 6:28 pm
The fact that Boehner said no is great news.
The debate was all theater anyway. Only in government can you cut 400B annually from a budget that has a deficit of 1.5T and call it a success.
One has to point the finger somewhere. The pressure for new spending comes more from the left than the right. Spending, regardless who initiates it has to be cut.
Comment by Plutocrat03 Monday, Aug 8, 11 @ 6:29 pm
Stupid!!! It’s NOT the deficit but the lack of future economic growth that is driving the stock market lower. If the U.S. deficit was the issue treasury yields would be skyrocketing (i.e. bond prices cratering), instead bonds rally and stocks fall. The stock market is a discounting mechanism of future corporate income growth, which ultimately depends on GDP growth. Perhaps, the “Very Smart People” have finally wised up that Obama isn’t up to the job and the Tea Party Goofs are running American Economic Policy.
Comment by Louis Howe Monday, Aug 8, 11 @ 6:39 pm
Meredith Whitney was dead wrong. The defaults to date have large been “dirt bonds” (i.e infrastructure for private developments issued by local government agencies). In many cases, the defaults have occured when hustlers repurchased dirt bonds from original holders and then defaulted probably taking big tax losses along the way.
Comment by CircularFiringSquad Monday, Aug 8, 11 @ 8:02 pm
yep, is name calling all you got? It is the government spending which can choke off the resources the private sector needs to grow.
If spending more than you have is an economic boon, then why are countries all over the world trying to balance their budgets? For that matter if unending budgets are OK, why do we need a tax increase
Government spending is the highest % of GDP except for the end of WWII. Going higher is not a good thing.
Comment by Plutocrat03 Monday, Aug 8, 11 @ 8:47 pm
This Country bails out everyone and helps every other country but turns it’s back on our own. State is just following the same. Buy russian
Comment by itzover Monday, Aug 8, 11 @ 9:21 pm
There’s bad faith here in this reckless and unpatriotic move by S&P, the people who just a few years ago gave you AAA rated subprime mortgage-backed securities.
They do not believe the U.S. is a worse credit risk today than yesterday. They are prostituting their brand for TV spots in the 2012 election.
Years ago when I was at the Bond Buyer, I got 15 minutes with Daley where he yammered on-and-on about how I should ask the rating agencies why they didn’t downgrade the federal government.
I asked a top guy at S&P at the time, and initially he made jokes about world’s largest economy, unlimited taxing power, rule of law and the most powerful military in history. Plus, the Fed could just start up the printing presses and cause inflation.
Then, he turned serious and explained how U.S. Treasuries were the bedrock of the worlds’ financial system, and that messing with them was a very dangerous and unthinkable game.
U.S. debt was AAA during WWII, when debt was much higher and victory not assured. S&P will go the way of Arthur Anderson, a name of unquestioned integrity undone in a few short years by cheap hustlers.
Comment by wordslinger Monday, Aug 8, 11 @ 9:28 pm
===then why are countries all over the world trying to balance their budgets? ===
And every one of those countries is having even worse trouble now.
Comment by Rich Miller Monday, Aug 8, 11 @ 11:12 pm