After a rating downgrade, US treasuries turn a profit

Two months ago, Standard & Poor's downgraded the bond rating of the United States government. So far, at least, the move has done wonders for investors in the very bonds that the rating agency disparaged.

The rating downgrade, along with continued turmoil in European markets and fears that the United States might be entering a new recession, caused a flight to safety among investors. And, notwithstanding the agency's opinion, money flooded into Treasuries and the demand for American dollars grew.

Since then, Treasury bonds have been one of the few investments that have produced good profits. As can be seen from the accompanying charts, an investor in long-term Treasuries would have earned a double-digit return, counting the small interest earned and the larger capital gains from rising prices. Shorter-term Treasuries have also rallied, although by smaller amounts.

When S.& P. cut the United States' rating from AAA to a still-high AA+, it went out of its way to praise France, which retains a AAA rating. Investors in long-term French bonds have not done badly over the period, with a gain of nearly 4 per cent, measured in euros, since the S.& P. move. Unfortunately, however, the weakness of the euro has more than offset that return.

Among the world's major currencies, the dollar has been nearly the strongest since the downgrade. Only the Japanese yen has outpaced it, and that by a small amount. The Chinese renminbi, whose value is set by China and allowed to rise gradually against the dollar, is also up, but that would have been true no matter what happened in other markets.

©2011 The New York
Times News Service