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Analysis Bank Austria Private Banking
US government bonds in high demand despite S&P downgrade in 2011

  • Ten-year US Treasury yields hit record low of 1.38 per cent at the end of July 2012
  • Market for US government bonds comes to USD 10.6 trillion
  • US Treasuries clearly dominate the market

Just over a year ago, at the beginning of August 2011, Standard & Poor’s (S&P) revoked the US’s AAA rating for its government bonds. This means that – at least according to the rating agency – the US no longer has the highest rating.

Nevertheless, US government bonds have gained in value by over 5 per cent since the downgrade a good 12 months ago. When the downgrade was announced, ten-year Treasury yields were at 2.56 per cent, and in July 2012, they hit a record low of 1.38 per cent.

In other words, despite the downgrade by S&P, demand for US government bonds has remained unscathed. Many international central banks, but also the US Federal Reserve Bank itself, are buying US bonds and in this way bringing down yields. In addition, important commodities such as oil are traded in dollars, which also raises demand for US paper.

The US government bond market is also very liquid. Australia, which still has a AAA rating from S&P, has roughly 116 billion dollars in marketable government bonds. Canada, which also has the top AAA rating, has 400 billion dollars in government bonds. In comparison, the market for US government bonds comes to a virtually inconceivable 10,600 billion (or 10.6 trillion) dollars.

Treasuries are also profiting from the euro debt crisis. A substantial number of investors, especially international ones, have reduced their investments in financial instruments from the Eurozone, and this in turn has driven up demand for US investments. It is not just US bonds that are in high demand; American equities are also displaying a noticeably higher PER than the Eurozone markets.

US government bonds clearly dominate the market
Government bonds from the US have not suffered from being downgraded by S&P over the past year. On the contrary, yields have fallen further and US Treasuries are in higher demand than ever before. One important reason for this is the fact that US Treasuries dominate the market. No other country has as liquid a market for government paper as the US.
However, none of this can disguise the fact that the US will also have to deal with its high government debt sooner or later. More attention is likely to be focused on this debate during the US election campaign and in the aftermath of the presidential election at the beginning of November.

Enquiries: Bank Austria Private Banking Research
Monika Rosen, Tel. +43 (0) 50505 – 40104;
E-mail: monika.rosen@unicreditgroup.at



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