Concrete Market-Based Evidence That the US' AAA-Debt Rating is Unraveling

Traders in the credit default swaps market are no longer showing the same faith in the USA that major credit rating agencies show. This past quarter, the price paid to insure against a US sovereign debt default recently jumped up nearly 30 percent. That spike in cost made the US the third worst performing nation in the derivatives market, after only Ireland and Portugal. Not exactly good company to be in.

According to Fortune:

“The cost of insuring against a default on U.S. government bonds via so-called credit default swaps rose 28% in the quarter ended Sept. 30, the firm [CMA] said.

“That puts the United States’ third-quarter performance behind only two other nations, both of which are struggling with the early stages of sovereign debt crises: Ireland, whose CDS prices rocketed 72% to a record amid growing questions about the costs of a massive bank bailout, and Portugal, whose costs jumped 30%.

“What’s more, the decline leaves U.S. debt trading at an implied rating of double-A-plus for the first time in memory.

“Despite building worries about its financial outlook, the U.S. had traded in recent quarters in line with its triple-A rating from S&P and Moody’s. But some skeptics have been arguing the U.S. is overrated, and that argument now seems to be gaining steam […] The rising price of insuring against a default on U.S. government debt is of a piece with these moves and suggests the full tab for the profligacy of the past decade has yet to be presented.”

On the other hand, the article goes on to highlight that the absolute cost of insuring US debt is still much lower than Ireland, a tenth of that price, and Portugal, an eighth. So, the run up in percent increase isn’t the entire story. Yet, the trend line still looks ugly. Ireland and Portugal are at least implementing austerity measures, while the US, on the other end of the spectrum, is on the verge of quantitative easing round two. It’s hard to say how long Moody’s and S&P can ignore the reality of the situation… they’ll have to consider what the CDS market is saying — that the US currently has an “implied rating of double-A-plus” — during their next rounds of debt rating deliberation.

You can more details in Fortune’s coverage of how the debt market has stripped the US of its triple-A rating.


Rocky Vega,
The Daily Reckoning