by David Berman
Here’s yet another theory why U.S. government bonds are failing to react much to the Standard & Poor’s cut to the U.S. credit rating outlook: The bond market had already priced it in.
From Jan Hatzius at Goldman Sachs:
Clearly, the U.S. fiscal situation is unsustainable unless a large, multi-year fiscal tightening is implemented. However, there is no information in today’s report about the fiscal situation that was not already known. Academic research has generally found that rating agency actions lag market pricing, rather than lead it.
This sounds reasonable, though it raises the question why the stock market was so quick to panic. The Dow Jones industrial average was down nearly 250 points at its low point during the day. Even though the Dow recovered about 100 points in afternoon trading, the stock market nonetheless stood out for its hysterical reaction to the S&P report.
The CBOE volatility index, or VIX – which is considered a fear gauge of the market – had jumped in early trading. But the gains were still slight: The index hit an intraday high of 19 before settling back to 17 in the afternoon, which is exceptionally low.
Last spring, during the stock market correction that followed the European debt crisis, the VIX had shot above 40. And during the initial reports of the Japanese earthquake and tsunami in mid-March, it rose close to 30. By comparison, Monday’s blip looks like nothing.
