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Calls for Surge in Rates Likely Exaggerated

Markets are rife with speculation about the impact of the Standard and Poor’s downgradeon U.S. interest rates. But history suggests that calls for a surge in rates is likely exaggerated.

CNBC looked at the impact of a downgrade on six AAA countries: Canada, Japan, Belgium, Spain, Ireland and Italy. The results: relative to the U.S. treasury yield (that is, the spread over U.S. treasurys) rates rose just 8 basis points one month after the downgrade and then proceeded to fall, 3, 6 and 12 months afterwards.

One year later, in fact, average yields for the six countries were 82 basis points lower relative to US treasurys than they were in the month of the downgrade.

Two big caveats: none of these countries was the world’s benchmark risk-free rate so it’s unclear how relevant any comparison can be. Also, the average of the six countries masks what happened in individual countries. For example, one month after its downgrade in 1998, Japanese 10-year yields were 73 basis points wider to U.S. treasurys, but Ireland was 36 basis points tighter. But all spreads came in over 12 months, from 190 basis points for Ireland to a low of 39 basis points for Japan.

CNBC also looked at the yields in absolute terms and the results were similar. After one month, yields of the six downgraded countries were on average 2 basis points lower than they were in the month of the downgrade, including a 40 basis point rise for JGBs but a 25 basis point decline for Ireland.

After 12 months, yields of the downgraded countries were 29 basis points higher, including a 137 point surge for Italy and 61 points for Canada, but a 78 bp decline for Belgium and 99 bp fall for Ireland.

Another way to think about what could happen in the U.S. is to look at the difference between AAA and AA yields on US non-financial corporate rates. Over the past decade, AA paper yields have been 16 basis points higher on average for five-year paper, although they are currently about 24 basis higher.

For 10-year paper, the average is an 18 basis point spread over the past decade, but the current spread is double that at 36 basis points.

Spread Off Treasurys

Canada
Japan
Belgium
Spain
Ireland
Italy
Average
1 mo. 0.03 0.732 0.02 0.04 -0.36 0.021 0.08
3 mo. -0.11 0.997 -0.1 -0.08 -0.63 -0.111 -0.01
6 mo. -0.03 -0.339 0.1 0.1 -1.43 -0.004 -0.27
12 mo. -0.39 -0.386 -0.67 -0.74 -1.9 -0.819 -0.82
source: Haver Analytics

Nominal Yields

Canada
Japan
Belgium
Spain
Ireland
Italy
Average
1 mo. 0.1 0.403 -0.13 -0.19 -0.25 -0.073 -0.02
3 mo. -0.27 0.296 -0.41 0.19 0.27 0.276 0.06
6 mo. -0.67 0.148 -0.72 0.54 -0.85 0.62 -0.16
12 mo. 0.61 0.237 -0.78 1.3 -0.99 1.365 0.29
source: Haver Analytics