The yield on the 10-year note has dropped to 2.44%, down from 2.57% at Friday’s close. I’m thinking this is telling us the economy’s on the way into the toilet, as the standard reaction for a credit downgrade is rising interest rates, to cover the extra risk. The Dow’s long slide, which began on 22 July–and continues with a 250 point loss so far today–is probably telling us the same thing, as earning expectations slide. Since the downgrade was one agency only, and the downgrade only to AA+, economic factors are clearly weighing more on the bonds than the downgrade. On the other hand, if you’re a gold investor, you’re probably a little happier today, as Gold hit $1,715/oz.
The key takeaway so far today is the continuing decline in yields, which isn’t good news. Thank goodness there’s no economic releases today. I’d hate to see what more bad news would bring.
So, back into recession, it looks like.
One of the more interesting things I’m wondering about, in a horrified kind of way, is what effect the downgrade has on corporate paper. A number of institutions have investment rules that require they concentrate their investments in AAA-rated securities. But, one of the general rating rules is that subsidiary corporate and government instruments cannot have a higher rating than their sovereign instruments. So if the US Government doesn’t have a AAA rating, no subsidiary US corporate or government paper should have a AAA rating either.
So, what does this mean for the handful of corporate and government instruments that were rated AAA prior to the downgrade? Do they get downgraded, too? If so, where do the institutions with a AAA rating requirement go with their money?
I’m not at all sure how this works. As we’ve been saying a lot in the last week or so, we’re in uncharted territory.
END OF DAY WRAP-UP: Well, that could’ve been worse, I suppose.
|Dow||10,810.83 -634.76 (-5.55%)|
|S&P 500||1,119.46 -79.92 (-6.66%)|
|NASDAQ||2,357,69 -174.72 (-6.90%)|
|10-Year Yield||2.34% -0.22%|
|Comex Gold||$1,710.20/oz (+3.7%)|
I’m not sure how much worse it could’ve been, though.
Well, this is encouraging:
U.S. government officials are bracing for the rating agency Standard & Poor’s to downgrade the country’s credit as early as this evening or take other possible action, according to someone familiar with the matter.
Open comment thread to answer the question: How screwed are we?
UPDATE: ABC news adds more:
A government official tells ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value.
Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited. [Emphasis added—Ed.]
So, it’s all your fault, Republicans.
UPDATE II: Politico’s Ben White (@morningmoneyben) tweets, "Senior govt official tells me S&P had planned to downgrade 2nite. And now may not. Weirder and weirder".
UPDATE III: Jake Tapper updated the ABC story above with new developments:
A third official says that S&P made a "serious mistake" in its analysis, "based on flawed math and assumptions," so the Obama administration is pushing back. But even though "S&P has acknowledged its numbers are wrong, it’s unclear what they’re going to do.," the official said.
S&P refused to comment.
What a strange set of developments.
Update IV: The Wall Street Journal provides a clearer look at what’s happening:
A mathematical error discovered late Friday by Treasury Department officials threw into limbo, at least temporarily, plans by ratings firm Standard & Poor’s to downgrade the top-notch AAA credit rating the U.S. has held for 70 years, people familiar with the matter said…
S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the debt, a government official said, and the firm presented its report to the White House. S&P has previously warned such a downgrade might come if Washington didn’t move to comprehensively tackle its long-term fiscal woes.
After two hours of analysis, 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. White House officials remained waiting Friday evening to see what the company would do.
That’s an enormous mistake for S&P. If you’re about to issue a downgrade to the United States, you’d better check yourself, son. After this, the Treasury Department will go to the wall on S&P if they try to downgrade.
Big black eye for Standard & Poor.
UPDATE V: Holy crap! CBS White House reporter Mark Knoller (@markknoller) just tweeted: “S&P has downgraded US Treasury securities from AAA to AA+. S&P bills downgrade as an ‘unsolicited rating.’" Oh, it’s on now. S&P has got big brass ones, because the Treasury Department and White House will now go 10-8 on their ass, after finding that $2 trillion math error.
UPDATE VI: Well, the first responses for the downgrade are in at Reuters. They seem pretty measured. Optimistic even.
I’m not sure how much more of a blatant warning than this can be sounded over the financial path the Obama administration plans on taking us:
Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating.
Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”
That’s a very civilized way of saying “cut spending and cut borrowing or we’ll cut your credit rating so you can’t borrow and can’t spend”. The budget deficits projected by the Obama administration would eventually see 15% of the government’s future revenue committed to debt service – about the same as in 1983. However:
This time the servicing burden would be harder to reverse, however, because it would not be caused by high interest rates but by high debt levels.
Moody’s says it doubts the political will to raise taxes significantly from their present 14.8% of national income level or to cut spending from 25.4% of national income. That, of course, means an ever increasing gap between revenue and spending and jeopardizes the nation’s credit rating.
Moody’s isn’t the first rating firm to issue this type warning:
The report follows concerns recently expressed about the US public finances from the other large rating agencies. Standard & Poor’s warned last week the triple A status of the US was at risk unless the country adopted a credible medium-term plan to rein in fiscal spending. Fitch Ratings issued a critical report on the US in January.
Fitch said: “In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will start to approach levels by the latter half of the decade that will bring pressure to bear on the triple A status.”
Or, we’re headed toward a financial cliff and right now our leadership is hitting the accelerator. If you think we have financial problems now, watch what happens of we suffer through the downgrading of our national credit rating.
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