Treasury exchange traded funds jumped Monday even though Standard & Poor’s downgraded its credit rating on U.S. government bonds.
The S&P downgrade and lingering worries over Europe’s debt quagmire had investors running into the perceived safe havens of Treasuries and gold.
The ratings cut had an immediate impact on market psychology, but the decision may not immediately change interest rates or investors’ desire for U.S. Treasury bonds and related exchange traded funds.
Economists stated that S&P’s decision to downgrade U.S. sovereign debt from its triple-A rating to AA+ for the first time in history will rattle the confidence of consumers and businesses during a very uncertain time, but it will have little effect on interest rates, reports Paul Wiseman for the Associated Press.
Normally, a country hit with a downgrade would immediately increase interest rates to bring back confidence in its sovereign debt. However, U.S. Treasuries are considered the safest investment, even with a downgrade, since investors believe in the U.S. government’s ability to pay its obligations.
“Anytime there’s a problem anywhere on the planet, investors come to the safety of the U.S., and they don’t go anywhere else,” commented Mark Zandi, chief economist at Moody’s Analytics.
“Where else are you going to put your money?” remarked Joe Libin, a mortgage banker. “We’re growing anemically. We’ve got a debt problem. But at least we’re bobbing along. We’re best-looking of the ugly kids at the prom.”
The ratings firms Moody’s and Fitch have maintained their top ratings on U.S. sovereign debt. [What Now for Treasuries?]
The S&P downgrade only applies to Treasury notes and bonds that mature in more than a year. Short-term Treasuries that mature in a year or less still maintain their original ratings. [The Contrarian: U.S. Treasury ETFs.]
For more information on the Treasuries market, visit our U.S. Treasuries category.
Max Chen contributed to this article.