Treasuries Downgraded; What Else Is New?
The market’s reaction to Moody’s downgrade of the Treasury’s debt suggests that investors are not surprised by this development. After all, the other rating agencies had already downgraded the U.S., so this was clearly possible, even likely.
Yields on Treasuries increased overnight, but only about 10 basis points. The dollar’s down but just a little, about 1% against the euro and only 0.5% against the yen. The S&P is down about 1% and the Dow about 0.6%, which are well within the range of recent daily fluctuations. Clearly, the market was not taken by surprise. Nor were we. The downgrade actually seemed inevitable and it is clear investors aren’t running for the hills. (Where would they run anyway?)
Perhaps the downgrade will provide some additional motivation for Congress and the President to come up with some additional ways to reduce the deficit. If that were to happen, the downgrade would be a blessing in disguise. In fact, House Republicans are currently negotiating a tax bill right now and the holdup is that a number of Republicans want more provisions to reduce future deficits. They now have some additional ammunition in support of their position. We wish them luck. If they are successful, the market would likely react slightly positively, but we see little reaction even without further deficit reduction.
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