When the United States issues government bonds, they’re assigned a credit rating that reflects the risk of default on that debt instrument. Many pension funds and average investors are required to buy AAA-rated Treasury bonds because they’re considered the safest. Ratings agencies have continued to warn that if they determine that whatever Congress does fails to improve the national debt outlook sufficiently, they may change the U.S. debt rating to AA or lower. That would mean the United States no longer is viewed as the safest of bets; investors instead would look to Germany, France, Great Britain and Canada as safer. Reaching the debt ceiling does not quiet all the issues at hand.
Moody’s Investors Service and Standard & Poor’s, when putting U.S. bonds on a credit watch in mid-July for a possible downgrade within 90 days, said they feared that the political stalemate could lead to a solution that didn’t significantly alter the course of the mounting U.S. debt.Lots of U.S. lending rates are based at least in part on the interest rates on U.S. government bonds. These include mortgages, car loans and student loans.
If there’s a ratings downgrade and U.S. bond yields rise, that will spill over eventually into lending rates across the economy. This means that school loans, mortgages and 401K’s take the hardest hits with interest rate climbs.This will add another head wind to the weak recovery.
UPDATE: Standard & Poor’s Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt. Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates. Officials at Standard & Poor’s say they will also indicate shortly how local and state governments will be affected by their decision on Friday to lower the long-term U.S. debt from AAA to AA+.The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities. In addition, many companies use the securities as collateral that they would surrender if their bets lost value. The lower credit rating for long-term U.S. debt means that it might be considered less valuable for those purposes. It might become more costly for companies to borrow or trade. Ten of the country’s 12 Federal Home Loan Banks also were downgraded from AAA to AA+. The banks of Chicago and Seattle had already been downgraded earlier to AA+
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