Those who point to falling Treasury yields since last year’s U.S. downgrade as a sign the rating should be higher show a “misunderstanding” of credit rankings, according to Standard & Poor’s.
Treasuries have returned 5.6 percent since the U.S. was stripped of its AAA ranking by S&P on Aug. 5, 2011, according to Bank of America Merrill Lynch index data, while yields have sunk to all-time lows. The rally in the past year may reflect investors seeking a “haven” from Europe’s debt crisis and demand for liquid securities, S&P said.
“Ratings are really just a rank ordering of our opinion of relative credit worthiness based on our criteria,” Peter Rigby, a credit analyst at S&P, said in a telephone interview. “It’s neither an objective nor goal or intent to determine yields or prices. Obviously, investors do that using a whole host of information and different investors have their different valuation objectives.”
The New York-based unit of McGraw-Hill Cos. cited the government’s lack of a plan to rein in its growing debt load and weakening “effectiveness, stability, and predictability of American policymaking and political institutions” in cutting the U.S. one step to AA+. The firm has a negative outlook on the U.S., as do Moody’s Investors Service and Fitch Ratings, which assign America their highest credit grades.
Foreign governments investment in the dollar, a reserve currency, and the dollar-denominated oil market provides an “insatiable demand” for the U.S. currency, S&P said.
Yields on Treasuries due in 10 years touched 1.38 percent on July 25, the lowest ever. That compares with 2.56 percent the day the U.S. was downgraded. “Investors, some of which include the Federal Reserve, have indeed pushed yields down on U.S. Treasuries in the past 12 months,” S&P said.
The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE. The central bank also pushed down U.S. borrowing costs by holding interest-rates near zero since 2008 and by announcing its intention to keep them there through 2014 to stimulate the world’s biggest economy.
“In the wake of the ongoing euro-zone sovereign-debt crisis, haven-seeking investors have turned to highly rated debt, including U.S. Treasuries, because of their relative safety and liquidity,” S&P said. “One of the attractions about buying and selling a U.S. government bond is the liquidity of the market.”
Australia, rated AAA by S&P, has about $116 billion in marketable securities, while top-rated Canada, Sweden and Norway have marketable debt of $400 billion to $40 billion, S&P said. The U.S. has $7 trillion of marketable debt, the firm said.
Treasuries due in five years yield 0.82 percent, compared with 1.55 percent for Canada’s similar-maturity debt and 1.09 percent for Sweden. Credit default-swaps tied to U.S. debt are priced at about 42 basis points, according to data provider CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market. Swaps on Sweden are priced at about 40 basis points, while those of Australia trade at about 62 basis points.
“Ultra-low yields on U.S. bonds don’t mean we should raise our rating on the U.S.,” S&P said. “Investors consider many other factors when pricing a bond, particularly liquidity. No other bond market in the world offers the kind of liquidity that U.S. Treasuries do.”
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
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