Interest Rates, Not S&P Ratings, Are The Key Metric For America’s Sovereign Debt

You should almost certainly ignore this: “Standard & Poor’s Ratings Service has lowered its long-term outlook for the United States’ sovereign debt to ‘Negative’ from ‘Stable’ due to risks from the country’s growing deficit.”

The thing about the United States of America is that we’re not an obscure country. Nor is our sovereign debt an obscure financial instrument. No major investor is going to be outsourcing his research on the desirability of American bonds to the S&P ratings service. There are two metrics to keep an eye on when assessing American debt. One is the interest rate the Treasury has to offer to get people to buy the debt. Currently that number is low. The other is the “spread” between bonds that are indexed for inflation and bonds that aren’t indexed for inflation which serves, among other things, as a gauge of market assessment of the risk that we’ll have no choice but to inflate the debt away. Currently that number, too, is low.