Standard and Poor’s downgraded France’s credit rating last week from AAA to AA+. While this downgrade has gotten a lot of press coverage, there are a number of topics surrounding the downgrade that are worth noting.
First, France now has the same credit rating from S&P as the United States. As you’ll remember, S&P downgraded U.S. sovereign debt from AAA to AA+ back in August 2011. Second, the yield on France’s 10-year bonds is at 3.08%. While this yield is well above the U.S. 10-year Treasury yield of 1.9%, it is certainly not a sign that the bond market sees substantial credit or interest rate risk associated with France. The media response to the downgrade is reminiscent of the situation in July last year when there was a media frenzy surrounding the possibility that the U.S. would fail to raise the debt ceiling and technically default on its debts.
Third, we can better understand the markets for debt (bonds) if we also look at the markets for equity (stocks). They are related. The appetite of investors for risk (and that of the market as a whole) varies through time. When investors are broadly risk averse, they are less willing to Continue reading