S&P Market Indicator Downgrades US Sovereign Debt to aa+

I thought it was interesting that S&P market-derived indicator has downgraded the US sovereign debt to aa+, its lowest level in two years. Further, US credit default swaps are now showing more risk than the Eurozone.

But as the article goes on to say, the risk of a US default is improbable. Long before they reach that point they will pay off the debt through inflation, the monetization of debt. If you think that this is not possible, that they cannot do it, that ‘inflation is impossible,’ then you are sadly mistaken. They are already doing it, but are trying to limit its impact through aggressive perception management and a variety of accounting gimmicks. It is really remarkable to watch. People cling to what they wish to believe until it sweeps them over a precipice.

Still, there is a message in this market, and I think it is one of selective default, but also a coercion. Those who hold the debt of the US, and its Banks, will seek to rule it, even moreso than they do today.

This is nothing new. Previous generations have fought the same battle, and won. Freedom is not a place to visit, or a thing to be achieved. Freedom is a commitment, a way of life, that will endure only as long as men love it for themselves and their children, more than their weariness, or their fear, or vain comforts.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank… Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money…

You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day

I would say that there is less risk to the US sovereign debt than there is to the US Constitution.

Wall Street Journal
U.S. Is Riskier Than Euro Zone; So Says CDS Market
By MICHAEL CASEY
MARCH 24, 2010, 4:47 P.M. ET.

NEW YORK — Something troubling has occurred in the market for default protection on the debt of the world’s biggest borrower.

As the folks at Standard Poor’s Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer’s default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default–however remote–is greater than that on euro-denominated sovereign debt.

So much for the view that low inflation and loose monetary policy make for a rosier debt outlook for Treasurys than for the debt of crisis-hit euro-zone sovereigns.

"We’ve seen CDS on U.S. Treasurys break with euro CDS before, but never to the degree we have here," said Michael Thompson, head of research for S&P’s

Valuation and Risk Strategies group. "If we sit on this precipice for a time, I think a lot of market participants would see this as a bit of a shot across the bow, a bit of a wakeup for anyone who’s complacent about U.S. debt. "

Wouldn’t it also challenge U.S. Treasurys’ status as the so-called "risk free" benchmark? S&P didn’t go there. But the report did say the trend "reflects increasing market anxiety surrounding the U.S.’s credit quality." In other words, a fiscal deficit worth 10% of gross domestic product–in the absence of a clear plan to reduce it — matters.

My first instinct was to dismiss the trend as an anomaly fueled by the technical quirks of an illiquid sovereign CDS market, where a conflicting array of investment strategies can confuse price signals. Some market participants use CDS contracts to hedge existing positions in underlying bonds, others sell default insurance as an alternative exposure to those bonds, while still more seek to extract arbitrage profits from playing between the two.

What’s more, the AAA euro-zone benchmark doesn’t reflect bets on a single sovereign’s debt but rather a basket of the region’s six remaining AAA-rated countries: Germany, France, Austria, Finland, the Netherlands and Luxembourg.

Disentangling its message on default risk could be messy. And what, after all, can a current-day contract on a future Treasurys default tell U.S. when a U.S. breach on its financial obligations is virtually inconceivable? [The government would pay for its debt with inflation long before opting for the blunt instrument of default.]… continue here. >>

Michael Casey, a special writer with Dow Jones Newswires, writes a regular column about currencies and fixed-income markets. Previously he was Newswires’ Buenos Aires bureau chief and before that, assistant managing editor for the U.S. economy, Treasurys and foreign-exchange group in New York.