The S&P's Belated Concern

As I got to the computer later than usual today, I hear the big news, Standard and Poor's rating agency changed the United States AAA credit rating to "negative" from "stable." Laughter ensued, after I realized I hadn't woke up to the downgrade, which would have been very unexpected. This change means there is a 33% chance S&P will downgrade the US credit rating further upon careful review over the next 24 months. Take into account S&P signaled two months ago about the change, this is no real surprise and in reality a AA+ is more accurate (while a A is more adherent to the Fitch Group definition). The same scenario played out in the UK two months ago as S&P changed their credit rating from "stable" as well. To keep things in perspective Moody's US credit rating remains unchanged, assuming the political process will develop, implement and follow through with enough tax raises, austerity measures and a bit of good old fashioned Washingtonian wizardry.



What this means to me is the market has received another signal "QE3" will be necessary to maintain a stable bond market. Pimco, the world's largest bond fund, recently made it clear they would cash out of all US debt and are actually short as we speak. Japan the 2nd largest foreign holder of US debt may decrease treasury purchases this year in the wake of the earthquakes, tsunami and Fukushima disaster. Recently the Treasury updated it's foreign holders of US debt. The revised list shows that China's treasury holdings skyrocketed going into July, the revised figures have taken into account large purchases by Chinese interests through UK based buyers. The results and details of the hundreds of billions in overseas purchases is unclear to me at the moment, though many motives come to mind. Who then remains willing and able to purchase treasuries the market will no longer risk buying at the price of a AAA bond, the Fed. Led by the US and Europe, the storm of monetary inflation will continue to pour on a world wide basis... until it floods.