We’re at one of those historic moments in the credit market, when U.S. government bond yields are clearly no longer considered one of the safest investments in town.
Key corporate debt now trades for lower yields than U.S. bonds of similar maturity. Note these are both dollar-based types of obligations, thus the difference in yield isn’t simply due to dollar-weakness fears. It’s due to default concerns:
Bloomberg notes that Berkshire Hathaway recently sold debt at 3.5 basis points less than Treasuries of similar maturity, and that Procter & Gamble and Lowe’s have seen their debt trade at lower yields than Treasuries as well. For a country with a rock-solid credit rating, this is pretty staggering (even if we are looking at temporary anomalies).
Whatever credit ratings firms may say, markets have now made it pretty clear that the U.S. is far from a risk-free debtor. It’s as if markets are already moving yields ahead of a potential cut to the AAA-rating. Thing is, given the precedent any cut would create, it’s highly unlikely credit ratings firms would actually cut America’s rating. Instead they’ll wink and nudge markets that the old risk-free rating is essentially gone, even it still officially remains… and markets have figured it out.