Bonds: Still a Safe Haven?

Treasuries have been a consistent theme in the news over the past month. Talks about a possible US default have kept bond-owners on edge. Any potential default means that they would not get paid for their coupons. Even though Obama has signed the debt deal, bond-owners are still worried about a possible downgrade on US debt by ratings agencies.

Europe has been a point of focus for debt talks and downgrades for the past year. We have seen many countries have their sovereign debt rates spike as downgrades have pushed some countries to junk bond or near junk bond status. Curiously, interest rates in the US got punished as bond prices soared as the debt deal went through. There are two main reasons of why this happened: poor economics and credit rating.

We have seen a lot of poor economic numbers in the past couple weeks from around the globe. This has led many to buy up Treasuries as they seek a safe shelter. As a result, bond prices have been bid up and rates have fallen. With the debt deal passed and the debt ceiling raised, chance of a default are slim. The lingering fear is a concern about a possible downgrade. Though this might be a very viable possibility, the US would only fall to a AA rating. This isn't exactly a terrible rating or one the would automatically demand a sudden increase in rates. Fitch has been the only company to comment as of now. They're not changing their current stance on the rating but might soon if no changes are made.

US Treasuries continue to be a safe haven as worries about the global economy resurface. The current debt deal has not had the impact that some thought it would. Should the US not change anything fiscally, ratings agencies could downgrade US debt. This wouldn't cause rates to spike although we should expect to see some type of rate increase. For now, bonds continue to be the safest place to be for the short term.