Sunday, August 7, 2011

Downgrade Dilemma

That the GOP's debt ceiling polity
Viewed a US default with frivolity
So provoked S&P
That investors may flee
To Treasury bonds for the quality.

In a move that surprised no-one, the Standard & Poor's credit rating agency downgraded the debt of the US government to AA+ Friday evening, citing primarily the "weakened...effectiveness, stability and predictability of American policymaking and political institutions at a time of fiscal and economic challenges." Since, as many market analysts pointed out, the move was long overdue, no material market reaction was expected. Indeed, the expectation is that Treasurys will remain the safe haven whenever investors panic, so, to the extent that the downgrade has lowered the general risk tolerance, it may even cause net inflows to Treasury bonds. Let the Asian trading day commence!

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