Downgrades: an observation

Since Britain’s sovereign debt rating was downgraded from AAA by Moody’s a couple of months ago, the UK’s cost of borrowing (as measured on its 10-year bonds) has fallen from 2.1% to just below 1.7%. That’s a 19.5% fall in borrowing costs. You can see it in the chart below (courtesy of Bloomberg).

UKdowngrade

Good – but not quite as good as the fall in borrowing costs enjoyed by the US when it first had its AAA stripped back in 2011. Its 10-year borrowing rate dropped from 2.56% to 1.89% – a fall of about a quarter.

USdowngrade

Yes, I know there’s a lot else going on here, but you can’t help but wonder: perhaps investors don’t merely ignore the ratings agencies, maybe they treat them as a contra-indicator.

One thought on “Downgrades: an observation”

  1. In terms of probability of default, I think most people just ignore the opinions of ratings agencies for countries whose debt is in their own currency.

    It might be that some in the market listen to it in terms of an indicator of the future strength of the economy. If that’s the case then a downgrade might cause them to expect future short term rates to remain low for longer and therefore accept lower rates on government bonds.

    Either way, I would have been amazed if rates had actually gone up following the downgrade.

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