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After S&P downgrade, debt markets disagree?

 

Standard & Poor’s downgrade of US government debt from AAA to AA+ had many analysts expecting a rise in yields on treasuries. Yields rise when prices drop. By essentially saying that the credit was not as good as previously thought, the risk is higher and therefore an increase in compensation in the form of yield would be demanded by investors who would pay less (causing price to fall and yields to rise) for treasuries.

That didn’t happen on Monday. Yields dropped as investors looking for a safe haven for money pulled out of equity markets put them in US treasuries. Demand pushed prices up, and yields down. So perhaps AA+ is the new AAA after all?

Related posts:

  1. Some tidbits from the US credit rating downgrade
  2. Convexity of Price and Yield for Bonds… and Rising Interest Rates
  3. What is Quantitative Easing?

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About Preet

Preet Banerjee is a Canadian personal finance commentator. He is a television host for The Oprah Winfrey Network, a Money Expert for The W Network, a personal finance columnist for The Globe and Mail, and a regular panellist on CBC's The National with Peter Mansbridge. He also appears frequently as a guest commentator on a variety of other programs and media.

Comments

  1. IncomePhan says:

    They don’t disagree. They just don’t have a choice.

  2. If Obama says they’re AAA, then I guess they are :)

    It’s quite obvious that many investors are flocking to dividend-paying stocks for the yield.

    Nice post

  3. Preet says:

    The yield on the S&P500 is higher than the yield on treasuries. If you can hold off getting shaken out of stocks if the volatility continues, better to get paid more while you wait. :)