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August 09, 2011 at 10:09 AM
The United States’ reputation for backing U.S. debt with a “full faith and credit” guarantee was tarnished late Friday when Standard & Poor’s lowered the nation’s long-term credit rating one notch to AA+ from AAA. And certainly, markets tumbled Monday as investors worried about the government’s ability to revive the stalled economy.
But amid the frantic selling, a beneficiary of the negative market sentiment was the very same asset class that caused the selloff in the first place: U.S. Treasuries. Yes, despite S&P’s downgrade of U.S. debt, investors rushed Monday into the safest haven they know, and 10-year Treasury note yields fell to 2.32% from 2.56% as prices—and demand—rose. Meanwhile, two-year Treasury notes hit record lows, yielding 0.26%.
Those numbers alone are proof that U.S. Treasuries are still a sound investment. But for those looking for more evidence that the United States’ unconditional guarantee on its interest and principal remains intact, here are the top five reasons why U.S. notes and bonds are still a good bet:
5) We Already Know What We Know.
The markets have been anticipating an S&P ratings action for months, so the news on Friday didn’t surprise savvy market players, who don’t expect a long-term negative outcome due to the downgrade. Says the fund company Neuberger Berman’s fixed-income team, which published a U.S. debt downgrade comment on Monday: “The historic downgrading of U.S. debt by Standard & Poor’s is likely to create short-term market volatility and cause some uncertainty as market participants work through what it all means. Ultimately, our current view is that the downgrade itself will have limited longer-term impact on the fixed income markets as it was generally expected and does little to change our overall positioning or strategy.” (Note, however, that Neuberger has been and will continue to be generally underweight Treasuries in its fixed-income strategies.)
4) There’s Nowhere Else to Go.
Since the financial crash of 2008, investors of all ages are turning to cash due to a strong desire to protect their assets, according to an MFS Investing Sentiment Survey. However, what investors may not know is that what they call “cash,” meaning liquid assets that can be tapped immediately, includes some form of U.S. debt. The MFS survey defines cash as bank accounts, CDs and money market funds—and the fact is, money market funds invest in short-term debt obligations including U.S. Treasury bills.
