Thursday, June 2, 2011

Moody's getting tough with US government

A rating agency with a backbone?

If there is no progress on increasing the debt limit, Moody's will place the US government's rating under review. Rating action may be taken by mid-July if there is no progress on negotiations. If there is a debt-ceiling default, Moody's would downgrade the rating from triple-A.

If the rating agencies do their job, there will be less need for the bond vigilantes to have to force activity on the government. Nevertheless, some would argue that there is no need for concern. 10-year rates are now at 3 percent. This level is at the lows for the last six months. If there is a credit problem, rates should not be lower but higher especially with 30/10 spreads. Rates have been fallen on the back of poorer economic news and the announcement of the end of QE2.

Markets can have a strong change in direction. A swift back-up is possible if there is a credit concern and this default risk is real.

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