I’m not sure what the downgrade means to the present or future generations.
I know Japanese 10yr bonds, rated AA- (one notch less than the new U.S. rating) yield something like 240bp less than treasuries.
Some differences of course, not reserve currency, higher savings rate, positive balance of trade, etc.
And I’m not sure how the math works here; lower rated stuff should trade at a higher yield than “risk free.” But what if the old risk free rate is what is being downgraded?
Do Luxemburg or Liechtenstien or the Isle of Man, each with no military power, less diversified economies, and much greater liquidity risk, carry the new risk-free rate on which we must base all valuations?
Bullshit, says I.
Risk-Free doesn’t exist. Never did.
US debt is still the reserve currency of the world and the “risk-free” benchmark, regardless of the opinion of a few arithmetically challenged analysts at Standards and Poors who only a few years ago awarded tranches of 580fico based CDO-cubed the same ratings as US sovereign debt.
Not sure I believe the outrage and panic of CNN.
There probably will be effects, but any dislocations caused by the re-jiggering of instruments whose management’s didn’t see this coming, is opportunity for someone else.
(And if it offers any solace, the Canadian stock market climbed 15% after they lost their AAA in 1993; Japan went up 25% when they lost theirs in 1998.)
(Disclosure: Short U.S. treasuries.)
Hope all are well,
J.
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