Are You Freaking Out About a U.S. Downgrade Yet?
While traveling over the weekend, I was asked on a few occasions whether I was concerned about the debt-ceiling talks. The short answer was "yes." I have been aghast at the idiocy and posturing in Washington over what should essentially be a procedural vote. Yes, we've been here before, but that doesn't make the boneheadedness any less jaw-dropping.
With that in mind, it was with a little surprise that I read a couple of articles featured on Yahoo! Finance this morning essentially arguing that a U.S. downgrade from the major bond-rating firms wouldn't be all that big of a deal. My first reaction: "Insanity." But there may be some truth to that; after all, the bond markets are massive beasts that often seem to do whatever the heck they want to do.
A look at the yields on bonds for some of the top- and second-tier sovereigns shows that there's no law that says a Moody's (NYS: MCO) Aa1 has to yield x%.
Top Tier Borrower
10-Year Bond Yield
Sources: Moody's, Standard & Poor's, Bloomberg, The Wall Street Journal, Trading Economics, The Financial Post.
Second Tier Borrower
10-Year Bond Yield
Sources: Moody's, Standard & Poor's, Trading Economics.
On the whole, the second-tier group is saddled with higher rates than the top tier. But this hardly tells the entire story. Belgium and, more so, Italy and Spain are under the storm clouds of the euro region's fiscal woes. In fact, if we look to the top-tier group, both France and The Netherlands (same storm clouds) are among the highest yields. And surely Japan and Hong Kong make a strong case that you don't need perfect ratings to maintain low bond yields.
Directionally, a sovereign downgrade would almost certainly push U.S. yields up
(meaning bond prices fall), but "skyrocket" seems to be a very Chicken Little choice of words when talking about a one-notch ratings downgrade.
So, am I still worried? Of course. Moody's and S&P may downgrade the U.S. regardless of whether we get the debt ceiling raised. But if this inane dithering takes us past Aug. 2 and there's even a sniff of default, we're talking a very different matter. Countries that default don't get Aa1 ratings. Want to see what it looks like when the bond market loses confidence in you? Check out the yields on Greek or Brazilian bonds.
What really keeps me up at night, though, is that I don't think many of those gumming up the Washington gears right now understand any of this. Maybe this shouldn't surprise me -- my fellow Fool Morgan Housel has pointed out that nearly half of all American's don't have a basic understanding of interest rates -- but it sure as heck scares the pants off me for now and the future.
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