Tags: carr | Traders | S&P | Downgrade | Bonds

Traders Disagree With S&P Cut and Buy Bonds

By Michael Carr   |   Wednesday, 10 Aug 2011 07:30 AM

Standard and Poor’s downgraded U.S. debt, making news and moving markets around the world.

In their announcement, the ratings agency expressed concerns about the ability of the government to repay the bonds. Political differences that were visible throughout the debt ceiling debate led S&P to think that the government could default.

The downgrade came on a Friday, after the markets closed for the week. As Monday morning dawned and the markets began trading again, traders in the bond market seemed to act as if S&P didn’t matter. Prices of Treasury bonds soared after the downgrade as equity markets around the world fell sharply.

Some analysts concluded that traders were buying Treasurys just to put the cash they raised from selling stocks somewhere safe, but that action still shows they don’t worry about what S&P says.

Other safe haven investments like gold and the Swiss Franc also traded higher as stocks crashed and could have been used by traders worried about a potential U.S. default.

If safety isn’t an issue, traders must have been focused on value. Interest rates are at record low levels, and the only way bond traders can make money on their buys is if rates fall even more.

It is unlikely they bought the bonds hoping the prices would fall and they’d suffer a loss so their actions indicate they believe bonds will rise as rates fall.

Buying shows that traders aren’t worried about the default risk. They are more likely worried about an economic slowdown. Interest rates decline as the economy contracts, and companies see profits decline in that scenario. Lower profits would lead to lower stock prices and that is probably why traders continue buying bonds.

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Standard and Poor s downgraded U.S. debt, making news and moving markets around the world. In their announcement, the ratings agency expressed concerns about the ability of the government to repay the bonds. Political differences that were visible throughout the debt...
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2011-30-10
 

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