It’s déjà vu all over again as the financial press mulls over the effects of a second ratings firm lowering the debt rating of the United States. If you recall, back on August 6th, S&P lowered the debt rating of the United States to AA+ from their prestigious AAA. Far from the apocalypse some financial and political writers predicted, the cost of 10 year debt in the United States has actually come down from 2.58% on August 5th to 2.34% as of October 28. Funny how that works… investors fled the debt of the United States and sought safety in… the debt of the United States.
When a Credit Rating Isn’t a Credit Score
Luckily for the United States (and other large borrowers) credit ratings don’t matter much. The truth is, the United States isn’t like you or me. Huge entities like the United States have open fiscal books and loads of economic indicators tracking every nuance of their economy. While credit ratings make sense for individuals, some companies, and even smaller municipalities, they are just another thread in an endless tapestry for the huge borrowers we are considering. Even if S&P, Moody’s, and Fitch all stop rating the debt of the United States tomorrow investors will still be able to accurately price whatever debt the US issues. For gigantic borrowers like countries, the most important metric isn’t the declared debt rating of some company. It’s yield.
Here’s how the United States stacks up against all of the countries which the S&P rates AAA, AA+, AA, or AA-. Remember, the United states is an AA+. For my sources (and a list of entities left out and why) please see the spreadsheet I compiled. I’m using 10 year debt as my benchmark.
How to Play It
Even though a credit rating is a measurement of a country’s ability to pay back debt, it was actually the stock market which experienced the most volatility post ratings cut. On August 3rd, the S&P 500 closed at a healthy level of 1,260.34. On the 8th, the first trading day after the ratings cut, it closed at 1,119.46… down 11.2% in just a few days. On Friday? It closed at 1,285.09. Perhaps the investors in the audience should consider any further rating cuts an investment opportunity?
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