A headline on the Business Insider blog caught my attention this morning: Once Again, Moody’s Is Behind The Curve, As The Debt Market Has Already “Downgraded” The US From AAA. The title of the story obviously served its purpose drawing me in, but after that it all fell apart as the author clearly demonstrated his personal bias in interpretting the information. The evidence provided to suggest the market has “downgraded” Treasury debt is that recently yields on Berkshire Hathaway, Proctor & Gamble, and Lowes debt have all traded lower than yields on comparable Treasury maturity paper recently. All three firms are top level corporate credits – AAA ratings.
If you’re thinking the author has it right, that Treasury yields being higher than those of AAA corporates means the market has effectively rated the creditworthiness of the US government below that of some companies, consider this. The US government has WAY more debt outstanding than any corporation – more than all the AAAs combined, and more coming all the time thanks to the big budget deficits. That’s the supply part of the supply/demand equation. More supply is going to tend to mean lower prices, and conversely higher yields.
Granted, if the market thinks a debtor is less creditworthy it will see lower prices (higher yields) because of reduced demand. The markets have been paying a lot of attention to that side of the equation, parsing the results of every auction and holdings report to look for any indication of slackening demand (and not finding much so far). It is important to realize, though, that both supply and demand have to be taken into consideration.
The author of the Business Insider blog post has demonstrated his bearish bias where US Treasury debt is concerned. That caused him to ignore or overlook part of the analytical equation.
It’s also worth mentioning crowding out theory. One part of that theory suggests that the more the goverment borrows the greater the impact it will have on general interest rate levels – driving them higher because investors will put more of their funds into government debt and less into the debt of other borrowers. While higher supply of government debt certainly can have a negative impact on the prices of that debt (they crowd themselves out), government borrowing is done to level off the government inflow/outflow balance out. That means government borrowing comes about because of government spending - money getting put into the economy. That spending improves the financial condition of the private sector (it has more money and/or less debt). The private sector doesn’t need to borrow as much and/or has more money to invest in government debt, so there’s no crowding out.
If you like this post or find it informative, I encourage you to sign-up for the newsletter.
Also subscribe to the blog feed and/or follow via Facebook or Twitter.
About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
Similar Posts:
- Taxes, Budget Deficits and Inflation
Bernanke’s view on inflation, I think
What does it mean to drain reserves from the short term money markets?
