Riding the Rollercoaster

Greek debt crisis…Spanish banks…U.S. debt ceiling impasses…July certainly had its share of rollercoaster news for the markets to digest. As an investment manager of corporate cash, we focus on how our buy list of securities should be adjusted given the backdrop of these types of developments. While much of this news has been developing for some time, through our proprietary FundIQ® research we see other managers evolving their credit and maturity exposures at different paces. Just like the bird migrations that occur each fall, there are the early movers and those who linger a bit, potentially risking the arrival of cold weather. So as data is released and events unfold, we certainly are not alone in evaluating and tuning exposures to remain consistent with our clients’ investment goals. We believe that active credit migration is at the core of managing a buy list and, in the end, limiting credit and liquidity exposures.

But what if credit developments include a downgrade of U.S. government debt? In mid-July, warning shots were fired by Moody’s and Standard & Poor’s, as both credit agencies placed U.S. government debt on review for possible downgrade, citing the dysfunction of the debt ceiling debate and the uncertainty of an impactful, credible solution to the rising U.S. government debt burden. The negative watch by both credit agencies demonstrates their willingness to act on a downgrade and underscores the potential that the U.S. could lose its AAA status in the next three months. There is a certain irony that Congress, which in the past has been aggressively critical of the rating agencies for not adjusting their opinions quickly and accurately to reflect changes in risk, is now facing a potential downgrade of its own. Perhaps the agencies will demonstrate they have learned their lesson.

As we discuss in this month’s’ research, we believe that the U.S. has a greater probability of losing its AAA credit ratings due to the lack of a credible debt reduction plan than due to the debt ceiling. We examine the potential implications of a downgrade and ways in which Treasurers can prepare for such a scenario.

Best Regards,

Ben Campbell
President & CEO