Since the beginning of the year, it’s been a tale of two cities for U.S. stocks and long-term U.S. Treasuries. The Vanguard Total Stock Market ETF (NYSE:VTI) has risen swiftly, while the iShares Barclays 20+ Yr Treasury Bond ETF (NYSE:TLT) has fallen swiftly.
On the fundamental side, the Chinese have been cutting their Treasury holdings, and the Federal Reserve’s massive shift from short-term to long-term Treasuries soon ends. On the technical side, TLT is now trading below key technical levels. So are Treasuries the safe haven they’re said to be?
A Bear Market for Credit Ratings
We can’t look at the U.S. Treasury market without noticing the dwindling influence of credit ratings, which is in the midst of a massive secular decline. This trend was first sparked during the 2008-2009 credit crisis, when Moody’s (NYSE:MCO), Fitch Ratings, and Standard & Poor’s (NYSE:MHP) erroneously gave subprime mortgage debt a top score. Just days before its September 15, 2008 bankruptcy, Lehman Brothers’ financial-products unit carried a AAA credit rating from S&P.
Despite so-called reforms, neither the U.S. government nor credit-rating agencies have taken any meaningful steps toward ensuring the accuracy of credit ratings. In essence, the Three Musketeers (Moody’s, Fitch, and S&P) are still the same conflict-riddled entities they’ve always been.
When Berkshire Hathaway‘s (NYSE:BRK.A) Warren Buffett declares that the U.S. government deserves an even higher rating — AAAA — he’s selling the idea that U.S. Treasuries are a safe haven. But instead of getting to the crux of the matter, Buffett’s view reinforces a fairyland notion of credit risk, which isn’t surprising given his ownership stake in Moody’s.
The thought that Moody’s or another credit-rater is an impartial judge of the creditworthiness of the U.S. government or anyone else is comical. And so is the mistaken belief that the integrity and judgment of those agencies, as raters, are beyond question.
For bond investors, the message is clear: Obeying perverted investment advice always leads to perverted results. Bond investing based on ratings is a broken strategy at all levels of the investment game.