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‘A Tree Falls In The Forest’: Wall Street Sees No Impact From Fitch Downgrade
Analysts, strategists and economists from around the country (and around the world) were compelled to weigh in Wednesday on Fitch's decision to join S&P (a dozen years later) in downgrading the US credit rating.
The move, which TD Securities' Gennadiy Goldberg amusingly described as "a tree falls in the forest," was mostly symbolic. Interested parties were divided on what, exactly, it symbolized. To Larry Summers, it symbolized ineptitude on Fitch's part. To other observers, it was a cautio
It is obvious that in the US and Globally there is no legitimate substitute for USTs. I own a whole lot of them in various forms. I started buying them in the 1950s (savings bonds when I was in fourth grade). My portfolio is built entirely on Treasury bonds. What made them great was all the things we read about here. But for us alive now, what they are now depended a great deal on the Treasury Accord signed in 1951. That deal made the Fed independent and allowed rates to fluctuate freely and be influenced by the Fed. When the Treasury issues bonds of various maturities, it auctions them at rates it sets and the actual market rate coordinates the contract proposal and the price buyers are willing to pay. The Treasury controls contract bond rates and maturities and the market buyers vote the actual rate through the prices they offer for a given security issue. When contract rates fall below market expectations the prices of existing bonds then fall as they have this year. My ability to profit handsomely from USTs for 25 years depended on the availability of bonds eschewed by the market at prices well below par. That made new securities out of these bonds and for me, at least, converted ordinary income to capital gains. When bought with borrowed capital this price action brought 100% returns to the table. Twenty percent was a piece of cake. Here’s the thing. After the accord the Treasury set rates as usual, but the Fed had independent tools it could use to control the operation of the financial system like reserve requirements and short-term lending rates to member banks. When they exercise those tools they can supersede the UST contract interest rates through market price changes forced by their policies. The irony to me is that as the Fed uses its policies to try to control system liquidity and reduce inflation, they totally blunt the value of existing investments in Treasury debt. I do understand this result and by not selling government securities with largish unrealized losses I can protect what was an acceptable contract interest distribution and actually see my income rise. However, those USTs don’t seem too great if you bought them in 2010.