Still seeking something else to buy should the US be downgraded after its debt ceiling folly?
The world’s pool of AAA-rated material is rapidly dwindling, and any destruction of the US triple-A will mean it shrinks even further. According to Nomura’s Charles St-Arnaud and Lefteris Farmakis, US Treasuries are by far the largest pool of investable AAA-rated assets with $11,151bn outstanding.
But they do have some alternatives for you — though these pale in size comparison to the UST market. In fact, if you put them altogether you’d only get about $8,700bn of leftover triple-A material.
(The reason the remaining AAA-pile is so low, is because it’s by no means clear what will happen to the almost $6,000bn-sized heap of agency Mortgage-Backed Securities (MBS). These are backed by a stream of future cash flows, but their triple-A is also largely derived from a US government guarantee.)
Anyway, the most obvious substitution would be to switch into other AAA-rated government debt. Germany is the next biggest available pool, with about $1,720bn worth of outstanding Bunds. Though Germany is not without its own, eurozone-sized debt problems and contingent liabilities.
The same goes for France, which has about $1,700bn worth of triple-A rated debt.
Meanwhile, the UK has $1,300bn of AAA-rated gilts — though it has problems too. Last year rating agencies flirted with downgrading the country. Meanwhile other commentators just think it’s doomed.
With Europe tilting towards the AA-bracket then, the obvious remaining candidates are Australia and Canada, with $300bn and $1,000bn worth of bonds, respectively. Of course, the uber-bears in us would love to point out that there are plenty of question marks hanging over these sovereign too.
But instead, we’ll just direct you to Nomura:
… Considering this risk, many investors may contemplate investing in Canada, with total government debt outstanding of 1.0trn, as well as other smaller and stable AAA-rated countries like Australia ($0.3trn) and Sweden ($0.1trn). These countries have a proven track record when it comes to fiscal policy and also boast a relatively buoyant economy. In addition, Canada and Australia benefit from large commodity wealth. We are already seeing some evidence of safe haven flows into the UK, Canadian, Australian and Swedish bond markets. Over the past few weeks, we have seen these bond markets outperform the US bond market, while their respective currencies appreciate against the USD. Note that the appreciation in both CAD and AUD has been larger than that implied by changes in commodity prices …
One wonders how the financial world will react to that shrinking pool of AAA, which they’ve essentially been able to use as risk-free credit. Will they simply adapt to a world with fewer ‘safe’ securities?
Or will they somehow seek or encourage a new crop of triple-A assets to be grown?
Related links:
The AAA bubble – FT Alphaville
Is it time to abolish the triple-A rating? - Felix Salmon
