U.S. could lose its triple-A rating
A Moody's analyst said the U.S. government may soon have to downgrade its triple-A ranking, which would force the U.S. to pay higher interest rates to borrow. What does this mean for Treasury bond investors? John Dimsdale reports.
A blank U.S. government check. (William Mahar/iStock)
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TEXT OF STORY
Kai Ryssdal: The credit markets are all about ratings. You get good ones, like Triple A, the very best, you pay less to borrow money. That's true for companies. And it's true for governments. So this morning when an analyst for Moody's said he's been taking a long hard look at the federal deficit and that America's Triple-A rating isn't a sure thing, it was most unwelcome news. Paying more to borrow the trillions that the Treasury Department needs to finance the stimulus bill and the bailouts is not a happy prospect for Washington or individual investors. Marketplace's John Dimsdale reports.
JOHN DIMSDALE: Uncle Sam has always been considered the world's safest borrower. Rating agencies figure he's good for his debts. But the White House is forecasting trillion-dollar- plus deficits through 2011. And David Jones, a former Fed official and now with DMJ Advisers, says the U.S. should heed today's warning from Moody's.
DAVID JONES: There will be a moment, we can't define it perfectly, when the world says we don't want to see any more of that debt. Interest rates will shoot up and the dollar will collapse. So we have a moment of truth coming here.
Individual investors who sought shelter from the financial headwinds by putting their money into Triple-A Treasury bonds might be dismayed. But David Kotok says it's highly unlikely the Treasury will default on its bonds, since it can just ask the Federal Reserve to print money.
Kotok is the chief investment officer at Cumberland Advisers in New Jersey. He says there are alternatives for risk averse investors, like bonds backed by state and local governments.
DAVID KOTOK: And a good example of an issuer that is very safe is the New Jersey Turnpike. They issued taxable municipal securities to fund some of their activity and those bonds pay a higher interest rate than the corresponding Treasury bonds.
Kotok figures the revenue for those bonds is pretty secure, since there's no other choice for people who drive between New York and Delaware.
In Washington, I'm John Dimsdale for Marketplace.
Comments
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From Redwood City, CA, 10/23/2009
Okay, that was just a dumb report. If you want to know how the marketplace is looking at the relative creditworthiness of bonds just check yields. Geeeez. Was there a negative spread yesterday with AAA corporates? Must have missed that. And proposing a NJ turnpike bond instead of a Treasury as a potentially "safer" investment? Moronic. Did your reporter read the bloomberg article about interest swaps today and how the NJ transportation trust is running out of money? I look forward to your upcoming segment on how horrible it is that the dollar is weakening...even though it was a good thing from 2001-2008.
From San Antonio, TX, 10/23/2009
As long as bonds are secured against inflation, should it matter? Are they or do you have to buy that special type?
From NC, 10/23/2009
It is not the size of the deficit that counts. Any one year's deficit is manageable, providing we don't sustain additional debt. The prime source of our problems is ACCUMULATED debt. It is essential that Congress and the President understand this.
From Playa del Rey, CA, 10/23/2009
Being dependent upon shows like yours to try to understand the local and world economy, this sounded to me like a topic that could affect the lives of almost all Americans! The large foreign purchase of US Treasuries has been periodically touched on before by you guys.
I would like to hear some more in-depth coverage on this subject and others that portend "train wrecks" if we continue on with current trends.
Your listening audience and show's notoriety would only snowball, and the attention you could generate might ultimately create enough increased public awareness to mitigate the problem(s). "And now listeners, from this week's 'Train Wreck file,' we report ..... ."
Carry on!
From St Louis, MO, 10/22/2009
As a Director of Fixed Income Services for a firm managing over $3 billion in bonds for individuals, I'm frankly stunned at the inference that risk adverse clients should consider municipal bonds over US Treasuries, justified by a comment like "The revenue for those bonds is pretty secure, since there's no other choice for people who drive between New York and Delaware."
Big APM fan, but this report was pathetic. Seemed like Free Chicken got more attention and thought than this important subject.
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