Wednesday, September 7, 2011

Time to rethink that downgrade?

Much was made of the S&P downgrade of the US credit rating. Many supposed it could have severe consequences, that investors might dump US bonds or the prices of the same might drop precipitously.

Now, as the EU struggles with a potential banking crisis, what do we discover?
Fears on both sides of the Atlantic have caused investors to dump risky stocks and flee to US Treasuries, a traditional safe-haven asset, lifting the price and lowering the yield of the bonds. The yield on the 10-year Treasury note, which moves in the opposite direction from its price, stood at 1.979 percent at 1615 GMT, after earlier plunging as low as 1.929 percent.
This series of events calls into question what--exactly--the ratings agencies really know and if they are actually any good at the job they are supposed to be doing, especially with regard to Standard & Poors.

The message from the street is essentially "screw your ratings, they don't mean a thing." And of course, we already know this is true, given the ratings that were issued for valueless mortgage-backed securities.

Cheers, all.

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