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By Simon Lack

China’s Gadong Global Credit Rating Company downgraded U.S. government debt earlier today, according to Bloomberg News. It’s not a story that has attracted widespread coverage so far. That may be in part because Dagong had already reduced the U.S. to AA, so this latest downgrade to A+ has less impact. It's also worth noting that Dagong has been frustrated in its attempts to gain recognition from the SEC as a Nationally Recognized Statistical Rating Organization (NRSRO), so their motives may not be wholly altruistic.

However, it is interesting to contemplate what this suggests about China’s appetite to continue investing in U.S. treasuries. Since it’s highly likely that Dagong’s announcement came with the blessing of the Chinese authorities, it may reflect their view that QE2-influenced yields do not provide sufficient return for the risk involves. China's central bank has already referred to QE2 as "uncontrolled” money printing If so, that’s not an unreasonable view. Yields are unattractive, particularly for foreign investors faced with a depreciating US$ as well.

This represents another step in the steadily deteriorating relations amongst large economies heading into the G20 meeting in Seoul. Investing outside the U.S. is the best defense for domestic investors, particularly in higher yielding emerging markets currencies. We own CEW and BZF.

Disclosure: Long CEW, BZF

Source: China Downgrades U.S. Debt