Why rates haven’t risen on threat of downgrade

Given the inability for our elected officials to send a budget to the president, the bond market seems focused on three developments:

“(1) A downgrade of Treasuries by at least one ratings agency.

(2) A more prolonged downdraft in economic activity, caused in no small part by the uncertainty raised by the debt issues.

(3) Clinging to the notion that a full-scale Treasury default will be avoided, mostly because it’s too painful to think otherwise.”

Paul Jacob, with Banc of Manhattan, points out that although these issues would normally cause the yield curve to steepen (leading to higher mortgage rates), but there are a few reasons why rates have not done much of anything.

“For one thing, markets are supposed to look past labels and truly assess risks – has the U.S. long-term deficit outlook really changed over the past 6 or 12 months? Then there’s the state of the economy – things are slow, which would keep rates low. And lastly, China, a major world economic influence, continues to hold US dollars and securities, helping prices.”

Very good points.