Ratings Vs. Market Realities: The Exodus That Never Happened
- Wednesday, 08/08/2012
A year ago, as the world struggled to recover from global recession, S&P made history by downgrading the credit rating of the United States — a first for the country long considered a safe haven. Common wisdom dictated that the inevitable consequence would be a rush to dump U.S. Treasuries as investors took the downgrade as a sign of instability in the U.S. markets.
The exodus never happened. The 10-year yield on 8/8/2011, just three days after the downgrade, stood at 2.319%. Today it is at 1.548%, continuing the rally that began in the fourth quarter of 2011. In fact, even PIMCO's Bill Gross capitulated and actually increased his allocation to Treasuries.
Since the perception of safety and liquidity seems to me to have trumped the anticipated impact of the downgrade, one may question the value of sovereign ratings and perhaps the significance of the entire rating system. If, in reality, the markets determine valuations, what role do ratings play?
Complicating the picture, the Federal Reserve has announced its intention to hold rates at low levels, which has the potential to distort the value of both Treasury and municipal bonds. It's therefore, in my opinion, more important than ever for investors to consider credit quality as they assess their portfolio holdings.
Source of yield data is Bloomberg. Quoted current yield is as of August 6, 2012.