Al-Khateeb: Rate of Foreign tourists coming for recreational purposes soars 600% in 5 years    Saudi Arabia participates in OIC anti-corruption agencies' meeting in Qatar    Saudi Arabia implements over 800 reforms to drive rapid transformation    Al-Jadaan: Painful decisions were part of the reforms, but economy overcame them    Al-Swaha: Saudi Arabia is heading towards exporting technology in the next phase    Israel-Hezbollah ceasefire appears to hold as Lebanese begin streaming back to their homes    Al Rajhi: Saudi Arabia sets revised unemployment target of 5% by 2030 "300,000 citizens employed in qualitative professions"    Imran Khan supporters call off protest after crackdown    Five survivors found day after Red Sea tourist boat sinking    Russia launched a record number of almost 200 drones toward Ukraine    Al Hilal advances to AFC Champions League knockout stage despite 1-1 draw with Al Sadd    Saudi Arabia unveils updates on Expo 2030 Riyadh master plan at 175th BIE General Assembly Riyadh Expo Development Company established to oversee strategic planning, operations, and legacy development    Saudi FM attends Quadripartite meeting on Sudan in Italy    Best-selling novelist Barbara Taylor Bradford dies    Cristiano Ronaldo's double powers Al Nassr to 3-1 win over Al Gharafa in AFC Champions League    Al Ahli edges Al Ain 2-1, bolsters perfect start in AFC Champions League Elite    Most decorated Australian Olympian McKeon retires    Adele doesn't know when she'll perform again after tearful Vegas goodbye    'Pregnant' for 15 months: Inside the 'miracle' pregnancy scam    Do cigarettes belong in a museum?    Order vs. Morality: Lessons from New York's 1977 Blackout    India puts blockbuster Pakistani film on hold    The Vikings and the Islamic world    Filipino pilgrim's incredible evolution from an enemy of Islam to its staunch advocate    Exotic Taif Roses Simulation Performed at Taif Rose Festival    Asian shares mixed Tuesday    Weather Forecast for Tuesday    Saudi Tourism Authority Participates in Arabian Travel Market Exhibition in Dubai    Minister of Industry Announces 50 Investment Opportunities Worth over SAR 96 Billion in Machinery, Equipment Sector    HRH Crown Prince Offers Condolences to Crown Prince of Kuwait on Death of Sheikh Fawaz Salman Abdullah Al-Ali Al-Malek Al-Sabah    HRH Crown Prince Congratulates Santiago Peña on Winning Presidential Election in Paraguay    SDAIA Launches 1st Phase of 'Elevate Program' to Train 1,000 Women on Data, AI    41 Saudi Citizens and 171 Others from Brotherly and Friendly Countries Arrive in Saudi Arabia from Sudan    Saudi Arabia Hosts 1st Meeting of Arab Authorities Controlling Medicines    General Directorate of Narcotics Control Foils Attempt to Smuggle over 5 Million Amphetamine Pills    NAVI Javelins Crowned as Champions of Women's Counter-Strike: Global Offensive (CS:GO) Competitions    Saudi Karate Team Wins Four Medals in World Youth League Championship    Third Edition of FIFA Forward Program Kicks off in Riyadh    Evacuated from Sudan, 187 Nationals from Several Countries Arrive in Jeddah    SPA Documents Thajjud Prayer at Prophet's Mosque in Madinah    SFDA Recommends to Test Blood Sugar at Home Two or Three Hours after Meals    SFDA Offers Various Recommendations for Safe Food Frying    SFDA Provides Five Tips for Using Home Blood Pressure Monitor    SFDA: Instant Soup Contains Large Amounts of Salt    Mawani: New shipping service to connect Jubail Commercial Port to 11 global ports    Custodian of the Two Holy Mosques Delivers Speech to Pilgrims, Citizens, Residents and Muslims around the World    Sheikh Al-Issa in Arafah's Sermon: Allaah Blessed You by Making It Easy for You to Carry out This Obligation. Thus, Ensure Following the Guidance of Your Prophet    Custodian of the Two Holy Mosques addresses citizens and all Muslims on the occasion of the Holy month of Ramadan    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



How S&P's warning could actually help US debt
Published in Saudi Press Agency on 24 - 04 - 2011

Awwal 20, 1432 H/April 24, 2011, SPA -- A warning from Standard & Poor's that mounting debts put the U.S. government's credit rating at risk blindsided markets last Monday. The Dow Jones industrial average lost more than 240 points in the morning before recovering. It was the worst one-day drop for stocks since fears over a nuclear meltdown in Japan sent investors into hiding on March 16, according to AP.
The response made sense. A downgrade of U.S. debt, after all, could turn into an economic calamity. Here's the surprising part: After a quick dip, prices for U.S. government debt began rising.
Economists and bond traders offer varying explanations for the Treasury market's curious reaction, but there's a common thread: S&P's warning shot could actually wind up making bonds more attractive.
If an actual downgrade were to occur, the effects would ripple through financial markets. When S&P lowers the credit rating on a country, it's saying that there's a greater chance the country won't pay its debts. Creditors demand higher borrowing rates. In the U.S. it would mean higher interest payments for the federal government. All borrowers _ from companies, homeowners to credit card users _ would find it harder to borrow. Presumably, bond prices would fall.
The strength of Treasurys, the very debt that S&P said was at risk, left many observers confused. Aren't U.S. government bonds more dangerous now?
«There's quite a bit of head-scratching going on,» said Guy LeBas, the chief fixed income strategist at Janney Montgomery Scott. «It looks like the bond market got hit in the head with a frying pan and is already up looking for a fight.»
One reason that traders say Treasurys have looked surprisingly stable is the belief that S&P's move could spur action in Washington to tackle the country's debt.
In recent weeks, Paul Ryan, the Republican chairman of the House Budget Committee, and President Barack Obama had outlined plans to shrink budget deficits. Even if they were far from sharing common ground, the proposals generated a sense of progress, says Nick Kalivas, vice president of financial research at MF Global. «There was a sense that we're going to get something done,» he says. «The move by S&P reinforced that.»
Kalivas and others say the threat of a downgrade may push Congressional Republicans and the Obama administration to reach an agreement on tackling the country's long-term debts. Cutting spending and raising taxes would lead the government to sell fewer Treasurys. A drop in supply would likely push Treasury prices up.
The warning could also prod Washington to make even deeper spending cuts more quickly than they would otherwise. Economists warn that slashing too deeply, just like raising taxes too high, could threaten the economic recovery. That could actually help the bond market, too.
When the economy slows, investors tend to take fewer risks and favor stable investments like bonds. During the financial crisis, for instance, Treasurys trounced other investments.
In a note sent to clients last week, Goldman Sachs economists said the greater threat of a downgrade wouldn't translate into higher long-term interest rates and lower Treasury prices. In fact, it would have the opposite effect. «A significant push toward fiscal austerity would lead to lower growth,» they wrote.
The Federal Reserve would also likely postpone raising short-term interest rates, because the threat of inflation would diminish. That, too, would add to the appeal of Treasurys.
In other words, what's bad for the economy is often good for Treasury bonds.
So how to explain the Treasury market's immediate reaction after S&P's announcement came out Monday morning? Treasurys dropped, causing the yield on the benchmark 10-year Treasury note to jump to 3.47 percent from 3.37 percent within 15 minutes. In the bond market, that's a giant leap.
Traders say there was initial confusion as they digested the news. Some panicked-sounding investors called trading desks asking how far the U.S. rating had fallen, mistakenly thinking the country had lost its AAA credit rating.
Many people glanced at the headline and saw the words S&P, U.S. and negative and assumed it was much worse than it was, says David Ader, head of government bond strategy at CRT Capital.
S&P lowered its outlook on the United States to «negative» from «stable.» That's never happened before, but it's not a downgrade. And it's not even the step before a downgrade -- «negative watch.»
S&P kept its highest AAA rating on U.S. government debt and said there was a one-in-three chance it would lower the rating in two years.
«Is this a downgrade, is this even a negative watch?» Ader asks rhetorically. «No, this is a negative outlook.»
An actual downgrade would likely cause markets to react in the same pattern as they did after the S&P news. Stocks would fall sharply and Treasury prices would weaken, but only slightly.
LeBas' study of previous rating changes on countries over the past 10 years showed stock markets took the brunt of the hit. In the three months after downgrades, Spain's market dropped 8 percent in 2009, and Japan's market lost 3.4 percent in 2011. Janney estimates that a U.S. downgrade would cause the S&P 500 index to fall 6.3 percent in three months.
It can seem counterintuitive that stocks would fare far worse than bonds in the event of a credit downgrade. Here's why it happens: When the credit rating of a whole country is lowered, it means investors view every business in that country as more risky, which is bad for stocks. And if you're trying to avoid risk, where do you put your money?
You guessed it, government bonds.


Clic here to read the story from its source.