There’s something both amazing and astounding going on.  Last month, Standard & Poor’s lowered its long-term outlook for the federal government’s fiscal health from “stable” to “negative.”  Since then yields on 10-Year Treasury Notes have dropped 18 basis points.

Here at the Economic Prism we may not know exactly how the world works.  But we have ideas on how we think the world’s supposed to work.  One of these ideas being that higher credit risk demands higher compensation.

Obviously, junk bonds are supposed to pay more than investment grade debt.  Who wants less compensation for buying riskier debt?

Hence, when a credit rating agency lowers its long-term outlook on the U.S. government’s fiscal health to negative we expect the 10-Year Treasury to pay more – not less.  If deficit spending isn’t reduced soon, not only will the credit rating outlook be lowered, the actual credit rating will be lowered too.

Surveying the fiscal landscape of the U.S. economy, and the bozos balancing the books, Standard & Poor’s came to a simple conclusion…

“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” said Standard & Poor’s credit analyst Nikola G. Swann back on April 18.  “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.” Continue reading →