Downgrade Doesn’t Matter as Bond Investors Show Faith in Fed After S&P Cut

As reported by Bloomberg’s Daniel Kruger, the $9.4 trillion U.S. government bond market is proving Federal Reserve Chairman Ben S. Bernanke matters more than Standard & Poor’s.

Even though the U.S. is poised to run a budget deficit of $1.6 trillion and S&P removed the nation’s AAA rating, investors are lending the government money at record low rates. Five days after the first downgrade to AA+, the Treasury sold $24 billion of 10-year notes to yield 2.14 percent. When the U.S. was running budget surpluses from 1998 through 2001, Treasuries of similar maturity yielded an average of 5.48 percent.

For all the conflict between Congress and President Barack Obama’s administration over the debt ceiling and deficits, bond investors say they are more influenced by interest rates, the economy and inflation. Because of the dollar’s preeminent place as the world’s reserve currency, the U.S. enjoys a “funding advantage,” S&P said in its Aug. 5 report.

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