The credit rating downgrade of US Treasuries discussed in a previous communication has come to pass. Yesterday, S&P lowered the rating for US Treasuries to AA+ from AAA.
As noted in that earlier communication, it is likely that the impact of this action on the Treasuries market will be muted. Given that S&P has been warning about this action for some time it’s effect has been priced into the market so practically speaking we already have our answer regarding its impact. We will see on Monday how the Treasuries market will react further since the official announcement came after the market close yesterday. So far, yields on US Treasuries have been dropping as investors seeking security have increased demand for US debt. The conventional wisdom is that this rating downgrade, and the threat of further downgrades in the future, will reverse this trend and cause yields to rise as investors demand higher interest payments in return for incurring the relative increased credit risk that a AA+ rating reflects.
As you know, I do not waste time trying to predict what the market will do in response to events such as this. I focus on controlling what we can by implementing and adhering to an investment strategy that allows you to stay on course for achieving your goals in spite of periodic, and inevitable, market declines. With regard specifically to our strategy of using Treasury Strips to build bond ladders for those of you entering or in retirement, I see no reason for changing this. The reality is that these investments remain the safest in the world, as evidenced by their continued high demand throughout the debt limit crisis and subsequent stock market drops. My conviction remains that holding Treasuries to maturity to fund your retirement cash flow needs is a prudent strategy that will serve you well throughout your retirement years.
Market volatility, while stressful, presents disciplined investors with opportunities. We will therefore be looking to opportunistically rebalance your portfolios by buying stocks at depressed prices. We will also look at taking advantage of any increased bond yields when adding to your bond ladders since higher yields mean lower bond prices, decreasing the cost of building these ladders. These actions will effectively allow us to “buy low and sell high” and add incremental long term performance while maintaining an equity/bond exposure ratio appropriate to your needs and risk tolerance.
I hope the above helps to put things in perspective during these turbulent times. As always, I remain available to answer your questions and discuss your concerns, whatever they may be.
Thank you for your continued support and trust.