The Rating Cut: Mixed Reactions
Even by Wall Street standards, last week was pretty tumultuous. The debt deal, the market’s sharp selloff, the wild volatility on Friday, the stealth downgrade by S&P on Friday night…all enough to keep traders and investors alike reaching for the aspirin bottles.
The true impact of S&P’s move on bond yields come Monday morning may prove to be relatively muted; rating agencies like S&P handed AIG triple-A status only a few quarters before the U.S. government had to pump in billions of dollars to keep it afloat, so many traders are taking the downgrade with a hefty grain of salt. Besides, the markets are always way ahead when it comes to this kind of thing, and despite the debt-ceiling circus last week, they are just not pricing U.S. bond yields as if S&P was on the right track.
However, the psychological impact of the downgrade has already been significant. Equity markets may face some tough sledding early next week simply because of the implicit increase in risk now associated with U.S. dollar debt. Interestingly, the downgrade may end up pushing U.S. T-bond yields even higher if equities sell off and investors flee to the perceived safety of bonds.
Either way, next week promises to be volatile indeed. Timed to hit the newswires well after the close on Friday, out of the reach of any trading marking that might react hastily, news of downgrade was crawling across most cable news channels by Friday evening, and it was quickly clear that some of S&P’s math was a little fuzzy. S&P’s chief sovereign ratings analyst even went toe-to-toe with CNN’s Anderson Cooper in an interview late Friday night, during which he acknowledged a $2 trillion mistake in S&P’s analysis. It takes a certain amount of guts to stand by your decision when you’re off by $2 trillion.
It is also clear that not everyone views the downgrade with the same degree of gravitas. Fox Business Network was in touch with Warren Buffet by Friday night and spoke to CME chief executive Terry Duffy and former NYSE CEO Dick Grasso on Saturday morning, choosing to ditch its regular Saturday schedule to favor of live analysis of downgrade’s impact on the economy. CNBC, in contrast, steadfastly maintained its sleepy Saturday morning lineup of infomercials, apparently deciding to play down the situation and refrain from adding to the media frenzy. At least that’s the only plausible explanation we can think of – it’s not every day that the debt of the United States is downgraded, so we admit to being a little surprised that the channel that prides itself on being “first in business” decided to sit this one out.
In any event, next week promises to measure up to the old adage about living in interesting times. Ultimately, we think the S&P downgrade will generate a lot of teeth-gnashing, but will not move the needles very much either way, since the markets have had ample opportunity to price it. Like a lot of people, we’ll be watching yields carefully – the bond market’s reaction on Monday will tell everyone whether S&P’s move is of any great significance, or merely a red herring.
Related posts:
- Bonds Brush Off S&P Outlook DowngradeRatings firm Standard & Poor's made some waves on Monday by downgrading its outlook for U.S. Treasury debt....
- Italy: A Country in Crisis or Merely Oversold?Yes, the world's tenth-largest economy, according to Euromonitor International, has been lumped in with the likes of Portugal,...
- Triple-Threat Debt: Tax Breaks, Unemployment, Bond Bondage“Tragedy comes in threes,” Senate candidate Christine O'Donnell told Tea Partiers, according to an account from CBS News....
- Moody’s Mood Globally Grim for Bonds, PoliticsMoody’s Investors Service put several large U.S. banks on notice Thursday that their debt ratings are being reviewed...
- “There Can Be Only One…”One of Sean Connery’s more forgettable performances was as Juan Sanchez Ramirez in Highlander, a movie in which...
Short URL: http://www.traderdaily.com/?p=14563
