Tuesday, August 9, 2011

The Debt Fall Out

Markets have been plummeting since S & P downgraded U.S. debt (although there was a resurgence this afternoon).  The resurgence is likely due to the Federal Reserve saying that they would keep rates low into mid-2013!  There are many reasons for this sell-off.  Economic information in the U.S. has been mediocre for a while, the European sovereign debt problem is awful.  The way that they intertwined economically, but not politically, may not be sustainable.  Further unification is unlikely, and nobody knows what a break up of the Euro or European economic zone would be like.

Today is also the first day that the Treasury Department has held bond auctions since the downgrade (more on that below).  We also found out that S & P downgraded Fannie Mae and Freddie Mac because of their supposed link to U.S. creditworthiness.  All of this has made me wonder of what other nations, states, and corporations have higher credit ratings than the United States.  I'm trying to compile a list of AAA rated entities.  Chart One is a map of global sovereign credit scores.  Green is AAA, turquoise is AA, light blue is A, darker blue is BBB, purple is BB, red is B, and grey is don't ask don't tell.

Chart One

Here is the current list of countries that S & P says are more credit worthy than the United States:

Hong Kong
Isle of Man
United Kingdom

Here is a list of U.S. non-financial corporations that have AAA status:

Automatic Data Processing
Exxon Mobil
Johnson & Johnson

Here is a list of U.S. states that have AAA status:

Maryland (under review)
New Mexico (under review)
North Carolina
South Carolina (under review)
Tennessee (under review)
Virginia (under review)

According to this New York Times article, many companies are not willing to do everything it takes to keep their AAA status.  For many of them it is not as attractive as being highly profitable, and doing so often involves less risky behaviors that are less profitable.  In 1982, 61 American corporations were AAA.  By 2000, that had fallen to 15 and now there are only four.  Even the renowned Coca-Cola is down to Aa3 (according to Moody's).  The real question is: are Berkshire-Hathaway, Coca-Cola, UPS really harmed by their downgrades?  Not if you follow UPS, which only had a jump in their corporate bond yields of .4%.

So before you jump out the window about the coming Great Depression, take a look at that last sentence.  Now I'd like to turn to what U.S. debt has actually done in the past few months.  This is a market that the Federal Reserve intervenes in significantly, but they can't influence the market in totality.

Chart Two

One thing to note about Chart Two, is the scale.  In today's auction, we're talking about .036%, and approximately half what it was the week before when the debt showdown was coming to crescendo.  Another interesting note about the auction is that it still had a bid to cover ratio of 4.27 bids to cover, which shows that interest in U.S. debt is far from dried up.  We'll keep on following this, but markets crash based on information, and this market has sustained this shocking information.

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