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S&P Downgrade: Impact 'Should Not Be Significant'

The Standard & Poor's downgrade of Treasury debt is much ado about not much, a note to investors from credit analysts at Barclays Capital concludes. "While this is a significant announcement for political and historic reasons," it says, "the actual impact of a rating change on the U.S. Treasury market should not be significant."

Their reasoning includes several points made this morning in an earlier post. Here are some others:

"It is difficult to find credit risk concerns specific to U.S. Treasuries in other markets. . . . While [the cost of insuring against default] on U.S. debt is now higher than it averaged last year, it is still tighter than that for, say, [Britain] and Germany. . . . Perhaps the easiest argument to make is that U.S. Treasuries are being driven mainly by the usual suspects - data, changing perceptions about monetary policy and fears of a new euro zone sovereign crisis. Credit risk has not been a significant driver of U.S. bond yields."
A 2010 Barclays Capital report decided that: "based on fiscal metrics alone, the U.S. was no longer [an] AAA-rated sovereign. But - and this is an extremely important but - the credit of a country is not simply a function of fiscal metrics. Two other important variables are political will and the reserve currency. While the political system in recent months has appeared dysfunctional, the reserve currency status provides the U.S. with a big advantage - our funding costs are not simply a reflection of our balance sheet.
"In addition, the tone of political discourse in the U.S. is now different from a year or two ago. The point of contention is no longer about whether to reduce the deficit or even by how much (both parties seemed to agree on a $4 trillion number as something to aspire to in a 'grand bargain'); the main issue is about how to get there. The answer is simple: a combination of entitlement reform and revenue-raising tax reform. Political will to take these tough choices has admittedly been in short supply, but . . . it was unlikely that investors expected these big questions to be solved before the November 2012 elections. S&P's action (and their rationale for downgrading) implies that the political system will not tackle these issues for several years. We do not agree."