Credit rating downgrade n yields rating, increase, situation, efficient, difficult

nixie24

Although credit rating downgrade should increase the yields however there's a reverse situation in US today with 10 yr tsy bond yields move from 2.56% to 2.35% in the last 2 days.

These super efficient markets use which correlation of CFA studies is difficult to predict.

former

When credit rating was downgraded on US bonds, I expected that interest rates to increase. Applying simple straight correlation, lower the credit rating - higher the expected return. However, surprisingly the interest rates dropped.

When I thought about it, not so surprisingly, if US bonds were downgraded and the expected return increased on them, all other assets(stocks and corporate bonds) that are measured against US bond returns, suddenly became richer and everyone wants to move out of them. All the money now needs to be parked back into safe instruments while they reevaluate the more risky assets, so the increased demand for US bonds decreased the rates.

Well, when markets are running for safe havens, US bonds are still triple AAA. Rating agencies downgraded US bonds due to political risk. When US starts cutting the debt the rating will eventually go back up. Will the downgrade eventually require higher rates on US Bonds? sure. But will it happen and if yes, when? not sure.

jacksparrow

You are misinterpreting credit ratings. They are a measure of relative risk. The fact is there is no "safe" place to put your money means people are rushing out of equities into bonds and that is keeping rates low.