August 8, 2011

Late last Friday, Standard & Poors did what had been rumored to be coming: it downgraded US Treasury debt from AAA to AA+ for the first time in history. There's no mystery to the Friday night action; the intent was clearly to let the shock of the change be absorbed by markets before they reopened Monday morning. Here's a quick list of what it will mean - and what it won't:

  1. Higher interest rates on US bonds? Not yet. Interest rates have been falling for the past few weeks, and right now you will get no more than 2.5% on a 10-year Treasury bond. No one actually expects that the US won't pay.
  2. Higher mortgage rates? Don't rush to lock in. Rates will probably fall further. If I were in the mortgage market I would be patient.
  3. How about stocks? Markets are headed lower for now, and are down overseas. There will likely be bargains, but as always it pays to choose very carefully.
  4. Potentially biggest near-term impact is political. The 2012 election cycle is already rearing its head and the downgrade will be something you can't escape hearing about.

A credit rating downgrade is not necessarily a permanent thing. If the US can improve its fiscal and monetary policies then it is perfectly plausible that S&P would upgrade the Treasury back to AAA. Also let's not forget that S&P (along with Moody's and Fitch) were the very same folks who gave AAA ratings to toxic bonds during the mortgage bubble - securities that in many cases blew up with disastrous results.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).