Downgrade Anniversary Shows Investors Gained Buying U.S.
By Mike Dorning, John Detrixhe and Ian Katz - Jul 16, 2012 12:00 AM ET
When Standard & Poor’s downgraded the U.S. government’s credit rating in August, predictions of serious fallout soon followed.
Republican presidential candidate Mitt Romney described it as a “meltdown” reminiscent of the economic crises of Jimmy Carter’s presidency. He warned of higher long-term interest rates and damage to foreign investors’ confidence in the U.S.
U.S. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said over time the standing of the dollar and U.S. financial markets would erode and credit costs rise “for virtually all American borrowers.”
They were wrong. Almost a year later, mortgage rates have dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened.
“The U.S. Treasury is still the widest, deepest and most actively traded in the world,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City, which advises community banks on investments of more than $40 billion. “That becomes all the more important when you have signs of weakening global economic growth and continued problems in Europe.”
Even in a slow recovery, the U.S. has unparalleled assets in the global market, including the size and resilience of its economy and the dollar’s standing as the world’s reserve currency. Low Treasury yields show that most investors believe the U.S. government will meet its obligations, no matter how dysfunctional the political climate becomes in Washington.
more:
http://www.bloomberg.com/news/2012-07-16/downgrade-anniversary-shows-investors-gained-buying-u-s-.html
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