Moody’s bond rating agency got into the act yesterday and put the US credit rating, which has been Aaa (highest rating) since 1917 on its “downgrade watch.”
No surprise there and markets largely shook it off. The 10-year Treasury is up a few bps (basis points, or hundredths of a percentage point) to 3.13% but the recent trend confirms that investors continue to believe there will be no default.
BTW, you’re well within your rights to take a jaundiced view of the bond raters—they didn’t exactly distinguish themselves when they were giving high grades to dangerous mortgage bonds a few years ago. But I agree with their assessment: “the probability of a default on interest payments [is] low but no longer de minimis.” More on that in the next post.
But here’s something from the Moody’s release that’s worth keeping in mind. I’ve stressed that in an economy where publicly held debt amounts to around $10 trillion, even a 50 bps increase in the interest rate adds $50 billion to debt service (and thus to the deficit). But it’s also worth contemplating all the other rates that are tied to the so-called “riskless rate” of US Treasuries.
“In addition to the financial institutions directly linked to the US government, Moody’s has also placed on review for possible downgrade pre-refunded municipal bonds…, certain housing bonds…, and other municipal ratings that are directly linked to the rating of the US government. Bonds issued by the governments of Israel and Egypt that are guaranteed by the US government were also placed on review for possible downgrade…[also], transactions backed by…government guaranteed student loans, and US RMBS backed by government agency mortgages.”
And that’s probably a short list. Tons of debt is benchmarked to the heretofore riskless T-bill rates and it will all become more expensive if the probability of default sharply increases.
We’re letting riskless get risky, and that’s not at all smart.