My last post laid out some of my thoughts on the debt ceiling negotiations. For those that missed it here’s the link.

http://www.acrinv.com/20110708710/blog/fixed-income-weekly-measuring-the-risk-in-risk-free

Unfortunately, not much has changed since my last post. The “Cut, Cap and Balance” plan has come and gone after passing in the House but failing in the Senate as expected. Several other plans are currently floating around Washington along with immeasurable amounts of political posturing, and rumors of progress have been the only result.

The rating agencies have joined the posturing party with threats to downgrade the US below AAA. They have explicitly said that they will downgrade the US Treasury if an interest payment is missed, but they have been less specific on what kind of deal congress will need to pass to maintain AAA beyond August 2. According to the ratings agencies, a downgrade isn’t averted with just any debt deal, but they haven’t provided much detail on what they would require. The ratings agencies took a lot of heat from regulators following the crisis for letting too many credits run around the market with a AAA label, and their actions during the most recent sovereign problems in Europe have been very reactive. To a certain extent the ratings agencies are being more proactive than they ever have been with threats to downgrade the US, sparking many to label their comments as very politically driven.

I still believe a deal will pass before the deadline. It will likely be a deal that both parties claim is not good enough, but they will blame that on their opponents, saying they had no choice but to get something through. But until we get closer the deadline expect more of the same.

Have a great weekend. 

Cliff J. Reynolds Jr., Investment Analyst