The World's Biggest Bond Investor on the US Downgrade

Generali

http://www.ft.com/cms/s/0/7c3f7704-c012-11e0-8016-00144feabdc0.html#axzz1ULIXNMPG

There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining....

...Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors.

It's well worth reading the entire article. You need to register but you can do so for free.

vivatifosi

Thanks Gen. In terms of the changes he talks about, it is interesting that the Chinese have already come out and blasted the USA:

"The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor's (S&P) for the first time on Friday."....

..."China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets."

http://news.xinhuanet.com/english2010/indepth/2011-08/06/c_131032986.htm

Mr_Mumble

I'm surprised there hasn't been more worry over the changes required to trading systems. There's a potential Y2K like scenario with the importance of the "risk free rate" in financial pricing models (e.g. CAPM and APT). Anyone using treasuries as this "risk free rate" could see their algorithms go haywire if they haven't planned ahead.

With so much trading now automated we could see some crazy activity next week. This is likely to be a damp squib, as with Y2K, but there is plenty of uncertainty over known unknowns here.

StevieJ

Could Artemis Stategic Assets short on US gilts at last pay dividends (so to speak)? and is it likely to have a knock on effect with regard to other safe assets e.g. UK and Japanese gilts?

sabretoothtigger

Well if they are short, they must be the ones paying dividends Yields are very low hence he classes that as low risk.
I read the FED will sell short dated bonds and buy 25 year ones instead, apparently JFK didnt something similar


UK gilts have dropped to lower yield then USA now We dont usually gain a premium over them. Japan bonds are crazy, the people are very rich so I would say its all about the people who are increasingly retiring using not saving money.

Japan wont sell from a downgrade, even Russia said no big deal (in the context of condemning usa policy)

Mr_Mumble

StevieJ wrote: »

Could Artemis Stategic Assets short on US gilts at last pay dividends (so to speak)? and is it likely to have a knock on effect with regard to other safe assets e.g. UK and Japanese gilts?

What I'm going to say now may look very foolhardy in a few hours time! Its unlikely bond markets will sell off to any great degree. The big players in government securities think they've got better research and analysis than the rating agencies. Even if S&P were considered wise arbiters a AA+ rating is not that much of a change in risk outlook from AAA. Considering the liquidity and, short-term, safety of treasuries you may see them go up (yields down) as action in the currency and equity markets is likely to be far more volatile.

Artemis Strategic Assets is a medium-long term play on the macroeconomic beliefs of its manager. I'm in broad agreement with William Littlewood's outlook (eventually the market will force a higher yield on UK/US/Japanese debt when developed economies eventually get back to 'normal' and the tiger/emerging market economies will continue to see an appreciation of their currencies). However, most commentators have been saying Japanese government debt has to sell-off (yields rise) for the past 15 years and it hasn't happened yet! The timing for these kinds of macro calls is ridiculously difficult.

tomterm8

Er... the money markets and bond markets could really spook next week, but if so it will be related to the euro mess and not the american ratings downgrade. Basically, S&P has given us no new information on that. People know the American problems and will ultimately take their own view.

I think the Euro mess is coming to a head. It has been kicked down the road about as far as it can be.

pqrdef

vivatifosi wrote: »

..."China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets."

China should be more worried about a reduction in US demand for its products. It's built its economic miracle on American spending. The last thing it needs now is the Tea Party turning off the tap.

gagahouse

tomterm8 wrote: »

Er... the money markets and bond markets could really spook next week, but if so it will be related to the euro mess and not the american ratings downgrade. Basically, S&P has given us no new information on that. People know the American problems and will ultimately take their own view.

I think the Euro mess is coming to a head. It has been kicked down the road about as far as it can be.

Can't disagree you with you here, the S&P downgrade was telegraphed weeks ago to the market.

Indeed the money markets will be key this week, namely euro interbank lending, it's my canary in the coal mine to start removing cash from banks into safer places. I'll be keeping a close eye on it tomorrow morning. The EU has to come out with something big now Italy and Spain are vulnerable - will ECB buying of their bonds put a cap on their yields and calm the markets down enough?

A._Badger

gagahouse wrote: »

Can't disagree you with you here, the S&P downgrade was telegraphed weeks ago to the market.

Indeed the money markets will be key this week, namely euro interbank lending, it's my canary in the coal mine to start removing cash from banks into safer places. I'll be keeping a close eye on it tomorrow morning. The EU has to come out with something big now Italy and Spain are vulnerable - will ECB buying of their bonds put a cap on their yields and calm the markets down enough?

This may seem a daft question, but what do you consider safer than banks, given the guarantee system?

gagahouse

Other state backed state institutions which are not casino banks, like cantonal banks, post office or some private banks, at least where I live in CH.

As for the "guarantee" scheme in the UK, there is supposed to be a fund payed for by contributions from all the banks to cover the default of a member which the FSCS pays out on. Relative to the trillions in deposits it couldn't possibly cover the failure of a large UK bank. So the govt will make depositors whole by either nationalizing them or printing the difference while it has a primary budget deficit.

But what do you do about any amounts you have over £85k even after exhausting spreading it across multiple banks?