1. S&P’S DOWNGRADE: HOW DOES IT CHANGE THINGS?
S&P’s downgrade of the US long term credit rating is a landmark historical event for the US. The ratings downgrade–from AAA to AA+– tells potential buyers of US government bonds that the risk of the US government defaulting on its $14 trillion debt has risen substantially. And to add insult to injury, S&P also slapped on a “negative outlook” warning to the downgrade. It’s worth noting that the other two big ratings agencies did not lower the US rating—just S&P.
2. DID WE LEARN SOMETHING ABOUT THE US ECONOMY FROM THE S&P REPORT ON THE US CREDIT RATING DOWNGRADE?
For those following the economy closely, the S&P rating report provided no new information about federal spending, federal revenues, future annual deficits or the accumulated debt.
But for the average person, S&P’s decision to downgrade the US credit rating is the second ominous signal in just two months—the first being the political crisis over increasing the US debt ceiling—that the federal government’s democratic institutions are not coping well with the dual problems of large future federal government budget deficits and slow economic growth. In the face of these two new signals, it would not be surprising to see increased trading and price volatility on US stock and bond markets, as investors become nervous—again—about the security of their investments.
So here’s the really amazing thing: In the face of increased risk on US bonds, investors are rushing into …. U.S. bonds!!! The last time I looked this morning, the yield on the ten-year U.S. bond had fallen from 2.55% to 2.38%. For those of you thinking about refinancing into a ten-year mortgage, this is the time to look into it, as mortgage rates are closely tied to US bond rates.
3. HOW WILL THE LOWER US LONG-TERM CREDIT RATING AFFECT NUTS AND BOLTS DECISIONS BY FAMILIES, BUSINESSES, AND GOVERNMENTS?
It will force insurance companies and “fixed income” funds to reconsider holdings of US bonds in their portfolios, as state and federal law requires these companies to hold only AAA rated investments as capital for some activities.
Some analysts are also expecting that the ratings agencies will downgrade the credit rating for Fannie Mae and Freddie Mac, the two large federal-government owned corporations that facilitate markets for residential mortgages. A lower rating on debt issued by Fannie and Freddie could increase the effective interest rate on a residential mortgage.
— Sumner LaCroix
