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Downgrades Galore, U.S. Debt Becomes Scary

Interest-Rates / US Debt Apr 23, 2011 - 02:36 AM GMT

By: Dr_Jeff_Lewis


As if there weren’t already ample reasons not to purchase US Treasury securities, the ratings agency Standard and Poors’ has provided investors with another reason: it may soon be downgraded.

The perfect storm is building.  Ratings agencies are taking a stance to downgrade US debt from its triple-A rating, which would send Treasuries plummeting and the cost of US debt service skyrocketing.   Standard and Poors’ fired what is best understood as a warning shot to investors in dropping its current outlook from “neutral” to “negative.”  The difference, though slight, implies a 33% chance that the United States will lose its triple-A rating within the next two years.

Investors should see the change in debt rating to be obvious: not only will  the US Treasury issue more debt this year than it has in any year in history, it will also begin to accumulate debt at a rate of roughly 10% per year, on top of interest rates of 3-4% on the longer end of the yield curve.  Such a trend means that the US debt could grow at a parabolic rate, much like that of the parabolic incline that gold and silver have realized as of late.

Trouble Comes in Threes

The common phrase is that trouble comes in threes; that is, where one bad event happens, expect two more in the near future.  This phrase couldn’t be better adapted for US Treasury debt.

There are in this country three major debt ratings agencies—Standard and Poors’, Moody’s, and Fitch—each of which are tasked with the job of providing ratings for debt ranging from municipal securities and foreign debt obligations and corporate issues to US Treasury debt.  They are, at least to the bond markets, the world's decision-makers.  In a matter of policy, these three agencies can downgrade or upgrade debt overnight, creating massive changes in the debt markets just by moving letters around.

In going forward, it is certain that Moody’s and Fitch will soon respond to Standard and Poors’ decision, and each future move toward a lower rating for US Treasuries is sure to incite even more selloff.  As we reported just weeks ago, the most influential bond trader in the world, Bill Gross, went short on US debt in his largest fixed-income portfolio, and the largest fixed-income mutual fund in the world.

Get Out, Now

The message to the market is quite clear: if you don’t have to own US Treasuries, then don’t.  Yields on US Treasuries are now negative; that is to say that for every coupon investors receive, they ultimately have less spending power.  Today’s low yields won’t make you rich, and skewed inflation numbers mean even owners of Treasury Inflation Protected Securities are losing money in real terms.

The only safe place to be is in your own dollar short, and none is better than that of silver.  While the run to $46 has been exceptional, future growth in dollar-terms is certain, with more money being printed with each passing moment, while investors and industry remove silver from the market.  Why wouldn’t you want to own an investment that is shrinking in supply, growing in demand, and denominated in a currency that is rapidly inflating?  The writing is already on the walls: commodities, especially monetary metals, are the only safe place to put your money.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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