Monday, August 8, 2011

U.S. downgrade worse for S&P than Treasury rates?

Just as I supposed yesterday, the stock of Standard and Poor's parent company, McGraw Hill has taken quite a beating today- much worse than Treasury bonds. Yields on Treasury bonds are actually down today (that's a good thing, for those of you not up on your bond trading; the riskier the investment the more interest investors want on their loans) because of a sell off of stocks. McGraw Hill on the other hand, is down almost 9% at the time I'm writing this.

The point is, S&P downgraded the United States and everybody's realizing how unimportant this agency is. This is the group that said toxic Subprime Mortgage-Backed CDOs were AAA. They've lost their reputation and any relevance they had. Like I said yesterday, I think pointing this out diminishes the opportunity the President has to punish Republicans for their role in the downgrade. However, there are some Democrats in swing districts that could benefit from pointing out how insignificant this has turned out to be.

It's incorrect to say that this is going to have no effect on the United States. A lot of things affect treasury bonds, and the rates didn't go down today because something good happened. It's because something worse happened somewhere else and investors think US bonds are a safe place to put their money. Eventually though, this will result in slightly more interest on the government's debt. These numbers just reaffirm that things aren't as bad as some might think and that one rating agency doesn't have the power we might think it does.

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