In 2020, Fannie and Freddie executives suddenly remembered that their firms were effectively government-sanctioned monopolies, allowing them to charge whatever they wanted.
So, they raised fees for refinances, costing every refi borrower an average of $1,400. Rates increased to accommodate this fee hike, and now nobody thinks about it.
And more importantly, Fannie’s and Freddie’s executives can again buy ski homes in Aspen instead of Breckenridge (and I was finally able to shut down the GoFundMe I started to help Fannie/Freddie execs return to Aspen).
Moody’s Downgraded U.S. Treasury Debt From AAA to AA1
I share this because this could be the result of the recent U.S. credit downgrade by Moody’s.
Rates shot up as a result of the downgrade, but in a few months, nobody will think about it (rates will just move up and down like they always do, but in a slightly higher range).
What happened exactly is explained in this Kobeissi Letter post.
Moody’s is one of the three main bond rating agencies, and they “downgraded” U.S. Treasury debt from the highest rating of AAA to AA1. This matters so much because bond or debt ratings impact the rates that borrowers (our government in this case) get charged.
And our government cannot afford higher rates!
Moody’s did this when they noticed that the Republicans (who all won elections by telling us that Democrats spend like drunken sailors) somehow got even drunker and found a way to continue to spend at drunken-sailor-levels nobody thought was possible.
Note: If we were to just return to pre-COVID spending levels, we would have a surplus.
BUT – much of the “temporary spending” (during COVID) and “inflation reduction” spending after COVID has of course remained in place (which is what ALWAYS happens) – and now we’re in a doom spiral.
How serious is this downgrade?
Well… I’d like to remind everyone that Moody’s used to give subprime mortgage-backed securities its highest rating prior to 2008 (when even my basset hound knew it was nonsense), and that didn’t work out so well. So, why this firm has any credibility remaining is beyond me.
This Is Not the First Downgrade (S&P in 2011 and Fitch in 2023)
In addition, we’ve seen this before. In 2011, S&P (another rating agency) downgraded U.S. debt, and in 2023 Fitch also downgraded U.S. debt. So, Moody’s was actually late to the party.
In 2011, after the S&P downgrade, rates went up briefly and then started to fall again. And 10 years later, rates were actually lower than they were in 2011.
In 2023, after the Fitch downgrade, rates went up briefly and then ended at about the same level by yearend.
Brent Johnson explains all of this beautifully in this recent video: US Debt Downgrade – What Comes Next…?
Even though the U.S. now has a lower credit rating than numerous other countries like Germany, Canada, Australia, and Sweden, the entire world will continue to demand U.S. Treasuries because we are the world’s reserve currency.
In addition, other countries are often worse off than the U.S. for reasons the rating agencies don’t recognize (worse demographics, weaker militaries, no reserve currency status, slower growth, other types of debt, etc.).
And finally, there’s the ol’ “over-reaction factor.” Rates were significantly higher early this morning, and macro-pundits on X were sounding the alarm bells (or, more likely, just trying to get clicks).
But, rates, while still higher than where they were on Friday, are not as high as they were this morning – and we’re already seeing price improvements.
So, yes, this “terrifying downgrade” could keep rates slightly higher.
But, we won’t notice it in a few weeks, and it could all be much ado about nothing… (again).
