Government bonds, wave of sales in the USA: what is the (double) logic behind the brutal market reaction

There is a logic behind the brutality with which the market is reactingor to the downgrading of the United States by Moody’sannounced on Friday in the night in Italy. Indeed, there is a double logic. The first is mechanical, but the second is political.

The performance of the Treasury

On the fact that the reaction is there and it is brutal, there may no longer be many doubts. The titles of the American treasure are very sold today and thirty -year ones have seen their performance rise up to 5% (the returns move in a mirror sense at prices). Even the US securities at ten years have sold ground today, with increases in returns just over 4.5%. Yet even at the beginning of April both had returns of at least 0.5% lower.

The repercussions on the dollar and on the European sovereign titles

This price shift, which corresponds to enormous volumes in an American debt market with 37 thousand billion dollars, is dragging others with cascade. The dollar came to lose almost 0.8% in a few hours on the basket of the other main coins. The main share index of Wall Street, the S&P500, is under pressure and in red since the opening. The European share markets suffer and particularly Piazza Affari, who arrived to lose up to 1.8% and then resumed a little, because the Italian public debt weighs in connection with the downgrading of the United States for the same problem. Sovereign titles in Europe also suffer a little.

The downgrading of the US rating

In part, in fact, it is pure financial mechanical. Some large institutional investors (pension funds, insurance) have precise constraints and internal rules as regards the quantities of investments permitted on certain levels of risk. For example, they can concentrate high volumes of sovereign bonds in portfolio only if they have the utmost reliability, defined by a rating in « triple a » by at least one of the three large agencies. But Moody’s on Friday was the last one, after S&P and Fitch, who took away the « triple a » to the American treasure. And this triggered a rain of automatic sales, which weighs on the markets today.

The promise to cut taxes

Some of these great investors are likely to review their internal rules in the next few days, precisely to adapt to the new reality. But then the political themes remain, more difficult to solve. At the Washington congress, on the push of Donald Trump, continues to go on the program of tax cuts of the president who threatens to create another 5,500 billion dollars of deficit on the next ten years.

The problem of the budget

But already today America is traveling to a public deficit of about two thousand billion per year, equal to almost 7% of the gross product. The promises make the American treasure must place an immense amount of paper on the market: only this year about two thousand billion dollars in new emissions, plus other eight thousand to renew the existing titles expiring.

But these enormous volumes make it not easy for Trump to finance the low -cost government, especially if in the meantime his economy slows down. From the beginning the question of the budget was the most important of its presidency. Now it also begins to become clear in the eyes of the markets.