US Credit Downgrade - U.S. Credit Downgrade and Effects on...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
U.S. Credit Downgrade and Effects on the Stocks and Bonds Markets Heather Booth University of Houston- Downtown
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Abstract The U.S. Credit Downgrade has been a huge political and economic debate over the past months. Days after President Obama signed an agreement to raise the nation’s debt ceiling, Standard and Poor announced the United States credit downgrade, resulting in insecurities and uneasiness about the state of the world’s primary leader. S&P decided the US Government is no longer proficient to manage its finances by showcasing they are “less stable, less predictable and less effective” (Detrixhe, and Murphy, 2011). The bipartisan agreement that met to find $2.1 trillion in budget savings fell short of was necessary to tame the nation’s debt over time. (Goldfarb, 2011). This decision publically pointed out Congress and the White House for sliding into gridlock over how to fix the nation’s long term debt problem (Rugaber, 2011). The effects are projected to swell through the stock and bond markets, and ultimately distress Main Street through mortgages rates, car loan and other long-term interest rates, and possibly higher property and sales taxes. The credit downgrade has created turmoil throughout the world, and the threats continue globally. Bonds The downgrade has somewhat harmfully impact the bond market. So far, it did little to dent the value of treasury instruments. Yield on 10-yr US Treasury bond has dropped roughly one dollar since the downgrade (Staff, 2011). The worst case situation is that interest rates rise on everything from car loans, home mortgages, home improvement loans, and more, but particularly on borrowing costs for the US government, which could add billions of dollars to the cost of servicing its debt. According to historical events where other countries lost their AAA rating, the price of bonds decreased only 6 basis points (Ademann, 2011). Therefore, based on other
Background image of page 2
countries histories, there is an assumption that the valuation of bonds will only decrease in prices barely worth mentioning in the short run. Domestic Influence In my opinion, interest rate movement in bond markets might be minimal at first considering investors have already accounted and anticipated for the credit downgrade. Investors' attitudes about the economy influence their demand for Treasury debt, and investors have been escaping from risk, uneager to lend money to the U.S. government and unwilling to accept low compensation. Yields on 10-yr Treasury notes dropped during the time of S&P’s credit downgrade of the U.S. to a low of 1.88 in October, however, November and December show us that it is beginning to slowly climb up once again based on short-term analysis (Yahoo Finance). As a result of the 10-Yr Treasury bond declining, domestically, corporate bonds may be
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/26/2012 for the course FIN 3302 taught by Professor Barnett during the Spring '11 term at University of Houston - Downtown.

Page1 / 11

US Credit Downgrade - U.S. Credit Downgrade and Effects on...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online