S&P Downgrades US National Debt

Word came in that Standard & Poor’s just downgraded US Debt:

Credit rating agency Standard & Poor’s on Friday downgraded the United States’ credit rating first time in the history of the ratings.

The credit rating agency said that it is cutting the country’s top AAA rating by one notch to AA-plus. The credit agency said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation.

A source familiar with the discussions said that the Obama administration feels the S&P’s analysis contained “deep and fundamental flaws.”

The fact that the recent debt deal didn’t accomplish anything other than smoke and mirrors is so obvious that I don’t think S&P’s pointing it out will catch anyone by surprise. However, whether or not the agency would actually take the step to downgrade is certainly an interesting event. There surely is a reason they picked after hours on Friday for this announcement.

It’ll be interesting to see how the Treasury market reacts. So far it’s always been a big yawn and actually no curtailment in Treasury buying whenever any of the big rating agencies warned about the outlook for US debt.

It is pretty apparent that a lot has to go wrong before the US government dares to default on interest payments for its national debt. So fundamentally I still see strength in this investment vehicle.

However, now due to this new rating certain institutional investors will actually have to drop US debt and shift to other assets.

How much this effect will counterbalance the global flight to safety into the Dollar and thus into Treasury bills remains to be seen.

Up to this point I have been consistently bullish on Treasury Notes and Bonds and they have done well over the past 3 years for sure.

It is certainly possible that global flight to safety will counterbalance an institutional selloff in Treasurys. However, it is also possible that this recent move will mark an end to the 30 year long bullish trend. Just intuitively, I see a 60/40 likelihood for both scenarios, respectively.

In the latter case, expect gold to soar even more.


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