U.S. loses AAA credit rating from S&P

[kerplunk]

"The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday, in a dramatic reversal of fortune for the world's largest economy."

http://www.reuters.com/article/2011/08/ ... VF20110806

Wow. Thoughts?

A reminder: Economic and Political POLICY comments/arguments are prohibited.--Taylor

[SurgPath]

Can't wait till Monday

[TheEternalVortex]

Now Treasuries are rated lower than subprime-backed CDOs? Way to go S&P.

[kerplunk]

This is all so unprecedented. Who knows what will happen now. I guess "stay the course," but as mentioned, Monday might not be a fun day.

[richard]

JPMorgan earlier said it wouldn't really matter:

An eventual S&P downgrade is still more likely than not, though we think this would occur after the fiscal commission completes its task later this year. We don't think a downgrade is of first-order importance for economic growth: conditional on fiscal metrics such as debt-to-GDP ratios, we see no major implications for borrowing costs due to the actions of one or more rating agencies.

https://mm.jpmorgan.com/stp/t/c.do?i=19 ... h_-1ni8eo3

[baw703916]

So in a practical sense, will there be any impact on institutional investors who are obligated to hold AAA debt? Is there some special dispensation for Treasuries, or are things still OK (for the moment) because the other 2 raters maintained AAA?

What I worry most about is forced selling. Could that happen?

Brad

[mhalley]

You mean the US couldn't pressure the S&P to keep the rating up like the banks did? Where is the threat of an sec investigation or irs audit?
http://www.bloomberg.com/news/2011-04-1 ... -says.html
Mike

[richard]

Reports earlier this evening were that the held up the downgrade due to a $2 trillion calculation error that the treasury noticed when it reviewed S&P's work.

Reportedly S&P said "The effectiveness, stability, and predictability of American policymaking and political institutions have weakened." Sources are reporting that if the House had passed a clean increase on a normal schedule, they would not have downgraded.

[thechoson]

This was already priced into the bond markets, right? I thought the prospect of a downgrade was on the table for a while now.

[Abciximab]

Remember: "Buy when there's blood in the streets, even if the blood is your own"... hopefully we don't bleed out trying to catch all these falling knives. (How many catch phrases can I use to make myself feel better?) Yikes.

[Beagler]

For those securities which require AAA bond backing, let's see if they change their mandate, or conveniently use another rating agency.

[afan]

No one pays attention to rating agencies evaluation of US debt. With them threatening to cut the AAA rating, treasury bond yields have continued to fall. If the market did not consider the US to be as secure an investment as possible, then would it lend to the Treasury at 2.56% for 10 years?

Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials back to say they agreed about the mistakes, though they didn't say whether it would affect the rating.

http://online.wsj.com/article/SB1000142 ... TopStories

Now that is impressive. Credit rating firm is off by close to 2 TRILLION dollars in its estimates, but is unsure whether that will affect its rating.

[stevewolfe]

So I heard a good point about this on the news the other day. Gentleman was positing that this would actually be bad for junk bonds and lower quality corporates. The reason being that as the rating of US treasury debt falls, funds that must maintain an average credit weighting might be forced to sell some of their lower quality holdings to offset the drop in treasuries... any thoughts?

[richard]

Here's the S&P's press release:

http://blogs.wsj.com/marketbeat/2011/08 ... s-release/

[SVariance1]

I wonder how this will affect other bonds such as US agencies, corporates and munis

[texas_archer]

This was already priced into the bond markets, right? I thought the prospect of a downgrade was on the table for a while now.

who the hell knows anymore

[tomas123]

hm?

http://www.marketwatch.com/story/sp-sai ... 2011-08-05

[Sidney]

This was already priced into the bond markets, right? I thought the prospect of a downgrade was on the table for a while now.

and if true, just goes to show you what bond investors think of S&P.

[thechoson]

hm?

http://www.marketwatch.com/story/sp-sai ... 2011-08-05

Unbelievable.

[richard]

Moody's and Fitch had maintained the US at AAA.

Many US institutional investment policy statements are written in terms of treasury or AAA, so the change would not matter for those. As far as I know, the typical alternative for other US institutions and for non-US institutions generally is a rating of AAA by two of the three, so those won't be affected.

[Abciximab]

Attention all young investors:

Now is not the time to talk about how much time you have left and what a wonderful buying opportunity this may be. After all, you don't know what this means to you either. Just keep in mind that there are a lot of people that will be impacted by this in a big way. Please don't be smug about your situation right now.

[Ben24]

This was already priced into the bond markets, right? I thought the prospect of a downgrade was on the table for a while now.

everything and anything is priced in the market, from every possible perception.... which means nothing is priced in the market until it happens. Hypothetically though... this has been on the table for quite some time and *should* have been anticipated as much as anything can be.

[BC_Doc]

Batten down the hatches. Stormy seas ahead!

[richard]

This was already priced into the bond markets, right? I thought the prospect of a downgrade was on the table for a while now.

Priced in means that the markets are aware of the issue and assign if some probability, most probably less than 100%. If the predicted event happens, you'd expect some movement, as the probability has gone from less than 100% to 100%.

[baw703916]

Moody's and Fitch had maintained the US at AAA.

Many US institutional investment policy statements are written in terms of treasury or AAA, so the change would not matter for those. As far as I know, the typical alternative for other US institutions and for non-US institutions generally is a rating of AAA by two of the three, so those won't be affected.

OK, that makes sense. It's not like anyone should be completely in the dark about the debt and credit issues, unless they've been under a rock for the last month.

[hsv_climber]

No wonder S&P was clueless during the financial crisis. How can they be off by a few trillions in their calculations?
Do they still use programmable calculators or have they already upgraded all the way to AT 80286?

[charityneedshelp]

Remember: "Buy when there's blood in the streets, even if the blood is your own"... hopefully we don't bleed out trying to catch all these falling knives. (How many catch phrases can I use to make myself feel better?) Yikes.

Abciximab, there is no blood on the streets in treasuries now. The rates are near historic lows. Are you saying now is the time to buy bonds?

[normaldude]

Good. There is no way US treasuries should be rated AAA.

[DaveS]

AA+ Still ain't bad. I think anyone who watched the spectacle leading up to the debt limit has to be thinking, gosh they almost defaulted. I think anyone considering buying US debt has to factor in a new risk. Maybe a future Congress will decide not to allow payment of US Debt. I have been posting about that concern all week. Dave

[wingnutty]

Timing couldn't be better

I have a bad feeling that we may be headed into a terrible spiral. I just have that gut feeling like we are hanging onto the cliff by our fingernails at this point. I'm only 31, but I feel horrible for all the baby boomers who are nearing retirement.

But hey, one never really knows, maybe a month from now we'll have turned a 180.

[MWCA]

Stocks are a screaming buy. Nothing to worry about here. But huge debt and massive continuous unemployment. This isn't a surprise.

[richard]

AA+ Still ain't bad. I think anyone who watched the spectacle leading up to the debt limit has to be thinking, gosh they almost defaulted. I think anyone considering buying US debt has to factor in a new risk. Maybe a future Congress will decide not to allow payment of US Debt. I have been posting about that concern all week. Dave

That political risk is the main reason they downgraded

[nisiprius]

We'll see what the effect is. I rather imagine that entities that buy huge quantities of Treasuries make their own judgments. I suppose interest rates will rise, but how much? I suppose Vanguard Total Bond Market will fall, but how much?

One effect will be that textbook authors will scramble to find some proper verbiage to refer to a synthetic "riskless asset," like a geometric point or the square root of minus one, rather than conveniently identifying them with Treasuries.

I'm not worrying, Treasuries are solid as the Old Man of the Mountains.

In tomorrow's headlines:

"SEC revokes Standard & Poor's status as NRSRO"

[word]

Well, suppose I should anticipate hitting my rebalancing band on Monday.

[Cherokee8215]

Attention all young investors:

Now is not the time to talk about how much time you have left and what a wonderful buying opportunity this may be. After all, you don't know what this means to you either. Just keep in mind that there are a lot of people that will be impacted by this in a big way. Please don't be smug about your situation right now.

I am a "young" investor and I agree with you 100%. While I'm sure it's with good intentions, the "I love it when stocks crash, I get to buy cheaper!" smugness that has been present on here the past day or two is not needed. Even older investors with appropriate AA's are affected by market declines. And young investors who are ahead of the game by having saved a lot over their short careers have seen their balances decline. We just need to convince each other to stay the course, not try to see who is the "winner" in the decline in prices, ala accumulator vs. retiree.

Personally, I probably have more saved/invested than most 30-ish folks, am pretty ticked off about the decline in my accounts, and don't care one bit if this presents a "buying opportunity" or chance to pick up things cheaper. It may be a benefit to accumulate at cheaper prices, but it does not dull the pain of the decline in what you currently have. I don't care if you're 25 or 85, it's true. I feel my asset allocation (about 75% equities, remainder bonds/cash) helps me sleep at night but I still get pissed when stocks crash.

[tbradnc]

I would be *extremely* interested in what anyone thinks about this:

http://etfdailynews.com/2011/07/25/inve ... ed-states/

Article dated July 25th, 2011 - Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

[stevewolfe]

Having rebalanced today...
I should've known this was coming...

[Beagler]

Would love to hear Mel's opinion if this wil affect TIPS.

[Abciximab]

Remember: "Buy when there's blood in the streets, even if the blood is your own"... hopefully we don't bleed out trying to catch all these falling knives. (How many catch phrases can I use to make myself feel better?) Yikes.

Abciximab, there is no blood on the streets in treasuries now. The rates are near historic lows. Are you saying now is the time to buy bonds?

I was talking about what will presumably happen to stocks on Monday. I don't really know what this means to bonds. Will outstanding federal bonds suddenly be worth less because of the increased "risk" from the downgrade? I honestly don't know. I just know I have no idea what to expect next week; bedlam more than likely.

[richard]

We'll see what the effect is. I rather imagine that entities that buy huge quantities of Treasuries make their own judgments.

The typical value of ratings is that they spend time analyzing issues so that others don't have to.

US treasuries are the most liquid and widely traded securities there are. US finances are rather heavily publicized and analyzed. Hard to see how S&P brings anything to the table or why anyone would trust their judgment more than the bond market's judgment.

On the other hand, the downgrade increases general nervousness, which can not help in this environment.

[Indices]

This is insane. A ratings downgrade allows these agencies to dictate policy to the government. In exchange for certain government actions, i.e. reduction of debt, we give you a positive credit rating. The ramifications of that are enormous. Nations cannot allow companies to blackmail them into certain fiscal policies.

My prediction: legislation that --political comments deleted--

[hsv_climber]

So, did S&P downgraded or not?
Latest report is showing that S&P is backing off from their downgrade statement.

[texas_archer]

This is insane. A ratings downgrade allows these agencies to dictate policy to the government. In exchange for certain government actions, i.e. reduction of debt, we give you a positive credit rating. The ramifications of that are enormous. Nations cannot allow companies to blackmail them into certain fiscal policies.

My prediction: legislation that --political comments deleted--

Someone has to oversee the credit worthiness of govt's if they expect individuals to purchase their debt.

[SVariance1]

It is very unclear to me what will happen to bonds. I guess they will fall but I don't think by all that much. A few weeks ago, I would have said and probably did say that bonds would sell off in a big way but now with the risk trade off, I am not so sure. My guess is that stocks will fare far worse than bonds on Monday.

[Indices]

This is insane. A ratings downgrade allows these agencies to dictate policy to the government. In exchange for certain government actions, i.e. reduction of debt, we give you a positive credit rating. The ramifications of that are enormous. Nations cannot allow companies to blackmail them into certain fiscal policies.

My prediction: legislation that --political comments deleted--

Someone has to oversee the credit worthiness of govt's if they expect individuals to purchase their debt.

How about the market itself?

[normaldude]

This is insane. A ratings downgrade allows these agencies to dictate policy to the government. In exchange for certain government actions, i.e. reduction of debt, we give you a positive credit rating. The ramifications of that are enormous. Nations cannot allow companies to blackmail them into certain fiscal policies.

My prediction: legislation that --political comments deleted--.

Yes, government should --political comment deleted-- No matter how bad budget deficits, national debt, and political gridlock gets, rating agencies should be forced to continue to give USA AAA ratings.

[richard]

Someone has to oversee the credit worthiness of govt's if they expect individuals to purchase their debt.

Perhaps you've heard of the bond market? There are also a few major financial institutions, analysts, media sources, etc. that comment of US fiscal matters every now and then. What do you think S&P adds to this?

[honkeoki]

Attention all young investors:

Now is not the time to talk about how much time you have left and what a wonderful buying opportunity this may be. After all, you don't know what this means to you either. Just keep in mind that there are a lot of people that will be impacted by this in a big way. Please don't be smug about your situation right now.

Er...

Remember: "Buy when there's blood in the streets, even if the blood is your own"

It's difficult for me to believe the same person made both of these posts.

[richard]

It is very unclear to me what will happen to bonds. I guess they will fall but I don't think by all that much. A few weeks ago, I would have said and probably did say that bonds would sell off in a big way but now with the risk trade off, I am not so sure. My guess is that stocks will fare far worse than bonds on Monday.

Who knows?

S&P is also threatening a host of other bonds issued by entities that depend on the US govt, a rather large group. From S&P's press release "On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors."

[kerplunk]

I am 25. I have money in the bank, no debt, and a steady income. I have never have been late on a payment of any kind, and I have always maintained absolutely FLAWLESS credit habits; yet, my personal credit rating is not even 800.

Therefore, credit ratings to me are only general ("good or bad") opinions on a person or entity and not very meaningful after that.

It's unfortunate, however, that most people do not have this view, and I think that will effect the markets negatively.