If A Country's Rating Is Downgraded, Its Interest Rates Go...

[inflating]

Um er http://www.bloomberg.com/news/2011-09-08/u-s-mortgage-rates-tumble-to-the-lowest-on-record-with-30-year-at-4-12-.html

[Chuffy Chuffnell]

Um er http://www.bloomberg.com/news/2011-09-08/u-s-mortgage-rates-tumble-to-the-lowest-on-record-with-30-year-at-4-12-.html

Could be to do with the Fed's impending "let's print £1000000000000000000000000000000000000000000 and see if that makes the economy grow, at least for a few weeks" ploy.

[inflating]

Could be to do with the Fed's impending "let's print £1000000000000000000000000000000000000000000 and see if that makes the economy grow, at least for a few weeks" ploy.

I'd have thought a small tick up or static even so, but no... they have it all sewn up it seems

[jonboy2010]

At least they have had a hpc.

[aa3]

I talked with a friend yesterday and he was saying the US is reaching its capacity to borrow. I responded you would think so, but look at the yields on 10 year bonds they keep going down. I would argue the US capacity to borrow is increasing.

Japan has a debt of 200% of gdp and its 10 year bond rates are something like 1.2%. So its capacity is yet higher still.

[inflating]

At least they have had a hpc.

btw the UK is not the only country that had SMI, Poland for example has some sort of program for mortgagors in trouble also, prices remain high in Poland although apparently down from peak (although the pound has dropped a lot anyway so Polish property prices seem high still)

I talked with a friend yesterday and he was saying the US is reaching its capacity to borrow. I responded you would think so, but look at the yields on 10 year bonds they keep going down. I would argue the US capacity to borrow is increasing.

Japan has a debt of 200% of gdp and its 10 year bond rates are something like 1.2%. So its capacity is yet higher still.

I really don't understand it all now

[qwerty1984]

If A Country's Rating Is Downgraded, Its Interest Rates Go

You think that a ratings agency should dictate monetary policy ?

[interestrateripoff]

I talked with a friend yesterday and he was saying the US is reaching its capacity to borrow. I responded you would think so, but look at the yields on 10 year bonds they keep going down. I would argue the US capacity to borrow is increasing.

Japan has a debt of 200% of gdp and its 10 year bond rates are something like 1.2%. So its capacity is yet higher still.

But Japan has stood still for 2 decades and has only been able to borrow because of it's trade surplus as it traded with the rest of the world. I'd argue Japan is nearing the end of this fantasy and reality is about to hit.

[inflating]

You think that a ratings agency should dictate monetary policy ?

Doesn't the market view the risk greater if an agency downgrades, greater (perceived) risk usually equates to a higher return (IR) demanded

[nmarks]

Up. The borrowing nation has to pay a higher premium to reflect the additional risk.

[thecrashingisles]

It's counter intuitive but the cure for debt aversion is higher interest rates.

[qwerty1984]

Doesn't the market view the risk greater if an agency downgrades, greater (perceived) risk usually equates to a higher return (IR) demanded

As a rule yes, but you have to look at what has actually happened rather than assume every case is the same.

The market can take any view it likes of a downgrade. The fact is that the market took very little notice.

In fact US Treasury bond yields have FALLEN since the downgrade!!! That shows you what the market views US debt as an increasingly safe bet relative to others.

[Nationalist]

Up, unless it's America, in which case, down.

[Chuffy Chuffnell]

In the Eurozone a country is downgraded, but they can't print away cash, so interest rates go up.

In the US the country is downgraded, but the Fed fires up the printing presses, so interest rates go down.

Not that hard to fathom.

[Goat]

I talked with a friend yesterday and he was saying the US is reaching its capacity to borrow. I responded you would think so, but look at the yields on 10 year bonds they keep going down. I would argue the US capacity to borrow is increasing.

Ultimately the US has plenty of scope to raise taxes and if necessary could cut military spending.

Compare and contrast with the UK and most of Europe where there's little if any scope to raise taxes and spending cuts tend to lead to riots in the streets.

[qwerty1984]

In the Eurozone a country is downgraded, but they can't print away cash, so interest rates go up.

In the US the country is downgraded, but the Fed fires up the printing presses, so interest rates go down.

Not that hard to fathom.

What a bizarre post.

What you seem to fail to "fathom" is the fact that they have not embarked on QE3.

Oh, and as for QE means interest rates go down. What on earth gives you that idea? QE has an upward pressure on IRs by causing currency devaluation, inflation and risks of credit rating downgrade.

[Chuffy Chuffnell]

What a bizarre post.

What you seem to fail to "fathom" is the fact that they have not embarked on QE3.

Oh, and as for QE means interest rates go down. What on earth gives you that idea? QE has an upward pressure on IRs by causing currency devaluation, inflation and risks of credit rating downgrade.

QE has an upward pressure on IRs?

No.

And you'll find the markets know full well QE3 is coming and so have factored that in already.

[Goat]

QE has an upward pressure on IRs?

Can you support your claim that printing money lowers borrowing costs.

Got to say it's a novel one on me.

[Nationalist]

...could cut military spending.

Are you now, or have you ever been, a communist?!

That's commie talk, that is!

[Chuffy Chuffnell]

Can you support your claim that printing money lowers borrowing costs.

Got to say it's a novel one on me.

It lowers rates for the government to borrow money because of the way QE is done.

Hence why UK and US borrowing rates are low and went much lower following their QE programmes.

If you can print away then there's no default possible. Need £1tn to pay back to lenders? Sure, print it. The Eurozone countries cannot do this, unless it is done at a Eurozone level (hence the need for Eurobonds). Now Germany has higher 1-year rates than the UK!

Ultimately it is supply and demand - if you print tons of money, increasing its supply, the cost of borrowing that money clearly falls. Sure it's now worth less, so you may have to borrow more, but ho hum, it's all short termism these days!

Edited September 9, 2011 by Chuffy Chuffnell

[24gray24]

Can you support your claim that printing money lowers borrowing costs.

Got to say it's a novel one on me.

If a government prints money, then uses that money to drive down interest on bonds (by buying its own bonds), ... it sounds a strange thing to do, like a snake eating its own tail, but that is what seems to be happening.

Government prints money, gives it to banks. Banks buy bonds. Demand for bonds is thereby artificially increased, so yields fall.

It's a fiddled market, basically. IMO.

[Chuffy Chuffnell]

If a government prints money, then uses that money to drive down interest on bonds (by buying its own bonds), ... it sounds a strange thing to do, like a snake eating its own tail, but that is what seems to be happening.

Government prints money, gives it to banks. Banks buy bonds. Demand for bonds is thereby artificially increased, so yields fall.

It's a fiddled market, basically. IMO.

Exactly. That's what QE is. It is governments printing money in order to support their deficits.