Treasuries to Lose AAA Rating?

Eddie Braverman's picture
Rank: The Pro | 21,111

The worldwide sovereign debt crisis may be about to take a turn for the worse if recent bond sales are any indication. Some corporate bonds have begun to yield less than U.S. treasuries, in effect suggesting that the corporate bonds are the safer bet. As reported by Bloomberg and NPR, Berkshire Hathaway 2-year notes are yielding 3.5 basis points less than similar maturity treasuries.

"It's a slap upside the head of the government," said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. "It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary."

It's not just corporate bonds that are beating treasuries, either. The U.S. now has to pony up an additional 60 basis points in yield to convince investors to choose U.S. treasuries over German bonds. Germany and Canada are the only G7 countries whose debt will not equal or exceed GDP by 2014.

Obama's proposed budget is creating a nightmare scenario for U.S. debt. Debt service is taking up 7% of the taxes collected today. Imagine the impact that losing our AAA rating would have on the amount required just to pay the interest on the national debt.

When private companies can borrow money on better terms than a global superpower, it's time for our country to get a check-up from the neck up.

Comments (20)

Mar 23, 2010

So now investing in Buffet is safer than investing in Unc Sam

Mar 23, 2010

I would rather have my net worth in BRK than US Gov't.

Mar 23, 2010

this makes no sense, since majority of BRKA assets are denominated in US dollar, do you really think BRKA bond is safer than US T bill?

Mar 23, 2010

In the long-term this is obviously an anomaly since the Treasury can just print money to satisfy its obligations, but in the short-term who wouldn't rather put their money with Buffet than Obama?

Mar 23, 2010

I'm buying CDS's on treasuries... it could be a great play

Mar 23, 2010

^^^ LOL. Now that's a ballsy bet.

Mar 23, 2010

If the US treasury defaults, how likely is it that you're counterparties will honour the CDS. More generally, I don;t see how any US company can honour its debt in a state of the world in which the US defaults. Of course, inflation risk is another matter but that only explains USD bonds vs Euro etc.

Mar 23, 2010
PZ87:

If the US treasury defaults, how likely is it that you're counterparties will honour the CDS. More generally, I don;t see how any US company can honour its debt in a state of the world in which the US defaults. Of course, inflation risk is another matter but that only explains USD bonds vs Euro etc.

He wouldn't hold them to expiration. Just until their price jumps (sky-rockets).

A few investors did the same thing with the banks in the run up to the crisis.

"The American father is never seen in London. He passes his life entirely in Wall Street and communicates with his family once a month by means of a telegram in cipher." - Oscar Wilde

Mar 23, 2010

I got that. My broader point was that I think CDS in US gov debt are ridiculous. If the price sky rockets, it indicates people think that they're worth something, which I would suggest is they're not given that I don't believe they'd ever pay off.

Mar 23, 2010

I don't like the sound of this.

-China

Mar 23, 2010

Funny, I was going to post this yesterday. It was a big topic of discussion at my internship as what to use for the risk free rate.

Best Response
Mar 23, 2010

I think you would want those counter-parties to pay off the CDS in canned tuna, peanut butter, ammunition, and maybe some gold bars.

Mar 23, 2010
moneyrunner:

I think you would want those counter-parties to pay off the CDS in canned tuna, peanut butter, ammunition, and maybe some gold bars.

I like where you're going

Mar 23, 2010
adapt or die:
moneyrunner:

I think you would want those counter-parties to pay off the CDS in canned tuna, peanut butter, ammunition, and maybe some gold bars.

I like where you're going

Sorry did I forget hookers?

Mar 23, 2010
moneyrunner:

I think you would want those counter-parties to pay off the CDS in canned tuna, peanut butter, ammunition, and maybe some gold bars.

Well played, sir. +1 for you.

Mar 25, 2010

funny cause i was just studying this, an i quote the book held that US Treasury notes are virualy risk free LOL

Mar 23, 2010

BRK credit is not the only thing out there trading rich to U.S. Treasurys. Witness a negative 30y swap spread since Oct 2008. 10y spreads just went into negative territory today. For those not in the markets here's what this means - market participants are willing to receive a 10y swap rate that is lower than the "risk free" 10y treasury rate...Crazy stuff

Mar 24, 2010

Treasury to loose its AAA rating??? how ?? the U.S. can print money whenever it wants... this isn't Greece. This is AMERICA! The only country in the world with a money tree printing press. we printed almost a trillion dollars about 2 years ago! did it affect the dollar much?
NO.

Mar 24, 2010

Yea, don't you think that the relationship will reverse itself? I'm long treasuries, short BRK.

Mar 24, 2010
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