In the first day of trading since S&P downgraded U.S. sovereign debt the stock market is off significantly. Right now, the Dow, the S&P 500 and the Nasdaq are all off significantly. Global stock markets are also suffering through a similar selloff in the first trading since the downgrade. So, with stock markets selling off in response to the news, what about the actual asset that S&P downgraded, U.S. T-Bills? How are those doing in today's trading? They're going up.
Yes, you read that right, the asset S&P downgraded is increasing in value as a result of the downgrade. Why? Because whenever there is economic volatility and investors seek a safe haven they go to the one thing that's considered as risk-less an investment as possible: U.S. government bonds. So, while stock markets fall on the news of the downgrade, the actual downgraded asset is trading up today. That's kind of embarrassing for S&P, isn't it?
Warren Buffett blasted the S&P move and said that our debt is still AAA, the S&P downgrade notwithstanding:
"If anything, it may change my opinion on S&P," the legendary investor said.As someone else put it:
"I wouldn't dream of putting it anywhere else," says Buffett, adding that at Berkshire, the only reason he's sold U.S. Treasurys in the past is to buy stocks or make acquisitions. And Buffett says Berkshire is still buying T-bills, even though yields have fallen so low. "If I have to buy (Treasurys) at a zero percent yield, I will," he says. "I don't like it, but we'll do it."
That's not to say that the nation's recent spending habits, the Fed's propensity to print money, and Washington's political gridlock haven't taken its toll on investor sentiment. Buffett recognizes that, as well. "Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA," Buffett adds. (emphasis my own)
"It just shows that the financial markets have concluded on their own that US Treasurys are the highest credit quality bonds that are available," said Jim DeMasi, chief fixed income strategist at Stifel Nicolaus in Baltimore. "There's no substitute for the safety, liquidity and basically the quality of US Treasurys. That's the market's conclusion. S&P has a different view of that and it hasn't changed market perceptions in any way."So yes, while S&P downgrades, and stock markets fall in response, the downgraded asset continues rise. S&P may have downgraded our sovereign debt, but, as conservatives are so fond of saying, the market has decided — and it has decided that U.S. government bonds remain AAA.
8:11 AM PT: CNBC reports President Obama will speak at 1 p.m. EDT
8:52 AM PT: CNBC just flashed a graphic with how U.S. debt is trading. All U.S. bonds are trading higher despite the downgrade.
9:01 AM PT: And CNBC begins its noon hour coverage noting that U.S. stocks are selling sharply, while U.S. Treasuries are rallying strongly.
9:39 AM PT: On CNBC they just had a Reuters report that quoted a Moody's analyst as stating that the US credit rating depends upon the expiration of the Bush tax cuts next year.
10:07 AM PT: Per CNBC, more than 600 stocks are at new lows today — the most since March 2009
10:14 AM PT: President Obama to speak at 1:30 p.m. ET
10:43 AM PT: Stock market at lows of the day. President Obama should be speaking any moment.
10:54 AM PT: President Obama is speaking now. Criticizes political process as leading to downgrade. Says market still rates US as AAA and that Buffett would give US an AAAA rating if it existed. Once again calls for balanced approach. Criticizes use of threat of default as bargaining chip.
11:02 AM PT: Krugman on the downgrade:
Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns. (emphasis my own)
11:18 AM PT: Dow down nearly 500; below 11,000. Nasdaq off 137.
1:47 PM PT: And the stock market closes with a bloodbath. Dow down over 630. Nasdaq down nearly 175. S&P 500 down nearly 80.