U.S., U.K. Sovereign Debt Could Lose AAA Status - How to Invest Accordingly

Includes: DBC, UDN, UUP
by: Alex Cook

Bloomberg headline: “U.S., U.K. Move Closer to Losing Rating, Moody’s Says.” Watch out.

Notable quotes:

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s (NYSE:MCO) in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

Full article

Frankly though, this should not be surprising. While I won’t necessarily go as far as Nassim Nicholas Taleb in saying that “every human” should be shorting US Treasuries, we have known about the rising debt and deficit levels for some time.

In every financial textbook, United States treasury instruments are listed as an example of a “risk free investment.” If a downgrade from AAA happens, perhaps future textbooks will list German or Norwegian instruments instead.

How to invest in light of this news

I maintain my bearish opinion on the US Dollar and sovereign debt in general. Greece and Spain are in worse shape than the United States, but investors should not view US treasury instruments with the bulletproof mystique that they may have in the past.

Consider investments that would hedge against a falling US Dollar, such as commodities, or high-quality bonds denominated in foreign currencies that will appreciate relative to the US Dollar. Possibilities include instruments in Canada, Australia, Norway, and Singapore. Look for countries with solid macroeconomic fundamentals, like current account surpluses and budget surpluses.

Other articles to read on this topic:

Disclosure: None