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S&P Places USA on Negative Outlook

“The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.

Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

How does the treasury market react?  Not very well:

Wonder if Bill Gross knew about this before he put his shorts on...

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Posted in Economics, Markets, Politics.

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4 Responses

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  1. Ivanov says

    The graph is a bit misleading, it’s rallied sharply and is now at the highs of the day. Bill Gross is a muppet and will be proved wrong again this summer.

    Anyway, not that S&P has any kind of track record of rating relevance recently… wonder why people would even listen to them anymore.

    The US needs to get its act together but default will never be forced upon it. It can result from a (misguided) political decision but “the market” cannot force it to default (unlike Greece).

    The logical conclusion if you think about it is that rates are not a market variable. They are a policy variable.

    Hence Treasuries won’t collapse. Not today, not tomorrow. The dollar may collapse. Not the bonds.

  2. Praetorian says

    The fact that somebody cares about what the rating agencies say is nothing short of stunning. They fact that they are used for regulatory purposes is unfair (for the monopoly that is granted to them) and just plain stupid.

    Every time I read the phrase: “The SP500 falls DUE TO…….blablablablalbalb” makes me want to stop reading newspapers all together.

  3. SurlyTrader says

    I always joke that every media outlet has to come up with a reason for market movements. It is pretty entertaining to see a CNBC article in the morning explaining why the S&P 500 is down and then see an article in the afternoon explaining why the market is up…

  4. SurlyTrader says

    You are correct, treasuries actually rallied throughout the day and yields ended up lower…an unexpected outcome if you believe S&P ratings matter.
    I will agree that S&P is behind the curve, but possibly this will (hopefully) spark some politicians to believe that a deficit cannot be run without market repercussions.
    I am not sure that I agree with your rates are entirely a policy variable, especially considering that a large portion of US debt is held by foreign countries. The natural idea is that you would never buy an asset that pays you a low yield in a currency that is declining in value. The two might become dislocated for a time (Japan), but eventually there has to be a day of reckoning in which the market forces you to press the reset button.

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