More on 'AAA' S&P Debt

August 11th, 2011 by 

Here at DQYDJ, we retrieved Standard & Poor's AAA 'Domestic Ratings' for sovereign debt on the morning of 8/11/2011.  Here's  the list of 'AAA' rated sovereign debt issuers you have already seen at our site: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.  We told you the other day that the only thing that really matters is the yield - the price at which a sovereign can issue debt.  Let's dig into that further!

The United States vs. 'Safer' Sovereigns

First off, we know that yield isn't the only number that matters when it comes to ability to pay.  Remember the term CDS, which most people were rudely introduced to back when the real estate bubble popped?  Credit default swaps are derivatives which allow someone to insure (or 'bet', if you want to make it political) against the default of issued debt... including debt from the United States.  

Onto the rest of the article. Liechtenstein doesn't issue 10 year debt, so it's not fair to include it.  Additionally, we are going to toss Guernsey and the Isle of Man out of our analysis: both are British Crown Dependencies, so get to inherit the United Kingdom's rating.  At 8:03 PST, US 10 year debt is yielding 2.21%.  Let's look at the rest of the field... thanks to Bloomberg's bond quotes.  We also didn't get our ratings for Hong KongNorway, and Singapore from Bloomberg.  Our yield for Luxembourg is stale by a few weeks.  That said, here's what we've got (US Included for comparison).

Apples and oranges? Maybe. Since most of these sovereigns can issue their own currency they may be able to inflate their way out of debt. We like you here at DQYDJ, but we're not going to calculate the expected inflation for each debt issuer unless you beg really hard. For the United States, a quick estimate (for the next ten years) can be found by subtracting the guaranteed yield on TIPS from the yield on 10 year bonds... on 8/10, 10 year debt yielded 2.17 minus -.13 (yeah, negative) meaning the market expects 2.3% inflation annually over the next 10 years...

So, readers, what do you think? Should S&P drop a few other countries from AAA? What's the deal with France? Will you really lose money to inflation when you purchase US 10 year debt? Discuss!



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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