Will the Impact of the S&P Downgrade of U.S Debt Be Exaggerated?
As you must know by now, S&P downgraded U.S treasuries. They did this after the market closed on Friday, so we really don't know what impact this may have. Oh, by the way, the other "major" ratings agencies - Moody's and Fitch - did not downgrade U.S. debt.
One blog I follow has listed "10 Questions About S&P Downgrade." (You can check it out by clicking here.) I read through the questions and found myself getting antsy. I began to wonder whether this whole downgrade - which has been discussed for months already - might wind up being exaggerated just because S&P was behind it.
The fact of the matter is that U.S. treasuries were already downgraded by two other ratings agencies. The first one, a Chinese ratings agency called Dagong Global downgraded U.S treasuries last year. Because this group was a) Chinese and b) a relatively new company, people basically ignored it, although it did create some stir for a brief period.
However, a ratings agency that is not considered one of the "major" ratings agencies by the name of Egan-Jones downgraded U.S. treasuries just a couple of months ago. This created a bit more of a stir, but wasn't considered that big of a deal in the end because, well, Egan-Jones isn't a "major" ratings agency.
Now, if the logic escapes you here - that it's not a big deal just because it's not a "major" ratings agency - you're not alone. The fact is, Egan-Jones is a highly respected ratings agency. In fact, when I worked for an institutional investment management firm that managed bonds as part of their offerings, the professional bond traders and managers had much more respect for Egan-Jones than they did for the "major" ratings agencies. That's how I first learned about Egan-Jones.
I saw Sean Egan interviewed after his firm announced the downgrade and found him to be thoughtful and intelligent in his comments. The interview reinforced my impression of the quality of work that his company provides.
But there are even more important reason to pay more attention to Egan-Jones than to those so-called "major" ratings agencies. Basically, institutional investors pay Egan-Jones to provide them with a credit analysis of the companies in which they are looking to invest. The "major" ratings agencies, on the other hand, are paid by the companies they rate - which presents an inherent conflict of interest. (You can read a more detailed analysis of this problem of conflict of interest by clicking here.)
Egan-Jones operates without conflict of interest; their ratings prove more reliable and accurate. So when they downgraded U.S. treasuries, I took notice. On the other hand, when S&P downgraded U.S. treasuries, I was less impressed.
On the other hand, the fact remains that people do indeed pay attention to the "major" ratings agencies - for better or worse. And so we may very well find that this downgrade will have an impact on the treasury market. It would be a bigger deal if the other "majors" (Moody's and Fitch) followed suit and downgraded treasuries, but they haven't done that yet.
So the bottom line is that we'll have to wait and see what happens this week. In spite of the fact that the Egan-Jones downgrade was more substantive by the very fact that Egan-Jones is a more reputable firm than any of the "majors," the markets may very well react more to this S&P downgrade.
One blog I follow has listed "10 Questions About S&P Downgrade." (You can check it out by clicking here.) I read through the questions and found myself getting antsy. I began to wonder whether this whole downgrade - which has been discussed for months already - might wind up being exaggerated just because S&P was behind it.
The fact of the matter is that U.S. treasuries were already downgraded by two other ratings agencies. The first one, a Chinese ratings agency called Dagong Global downgraded U.S treasuries last year. Because this group was a) Chinese and b) a relatively new company, people basically ignored it, although it did create some stir for a brief period.
However, a ratings agency that is not considered one of the "major" ratings agencies by the name of Egan-Jones downgraded U.S. treasuries just a couple of months ago. This created a bit more of a stir, but wasn't considered that big of a deal in the end because, well, Egan-Jones isn't a "major" ratings agency.
Now, if the logic escapes you here - that it's not a big deal just because it's not a "major" ratings agency - you're not alone. The fact is, Egan-Jones is a highly respected ratings agency. In fact, when I worked for an institutional investment management firm that managed bonds as part of their offerings, the professional bond traders and managers had much more respect for Egan-Jones than they did for the "major" ratings agencies. That's how I first learned about Egan-Jones.
I saw Sean Egan interviewed after his firm announced the downgrade and found him to be thoughtful and intelligent in his comments. The interview reinforced my impression of the quality of work that his company provides.
But there are even more important reason to pay more attention to Egan-Jones than to those so-called "major" ratings agencies. Basically, institutional investors pay Egan-Jones to provide them with a credit analysis of the companies in which they are looking to invest. The "major" ratings agencies, on the other hand, are paid by the companies they rate - which presents an inherent conflict of interest. (You can read a more detailed analysis of this problem of conflict of interest by clicking here.)
Egan-Jones operates without conflict of interest; their ratings prove more reliable and accurate. So when they downgraded U.S. treasuries, I took notice. On the other hand, when S&P downgraded U.S. treasuries, I was less impressed.
On the other hand, the fact remains that people do indeed pay attention to the "major" ratings agencies - for better or worse. And so we may very well find that this downgrade will have an impact on the treasury market. It would be a bigger deal if the other "majors" (Moody's and Fitch) followed suit and downgraded treasuries, but they haven't done that yet.
So the bottom line is that we'll have to wait and see what happens this week. In spite of the fact that the Egan-Jones downgrade was more substantive by the very fact that Egan-Jones is a more reputable firm than any of the "majors," the markets may very well react more to this S&P downgrade.
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