As we all are well aware, our nation is facing a financial crisis like none ever faced in our nation’s history. With discussions of a potential default by the federal government within days, we are in unprecedented times with no road map that will lead us to better times and financial stability. While Congress and the White House debate the politics of raising the national debt ceiling limit, the financial markets continue to experience volatility. While the Dow dropped almost 100 points on Friday, July 29 – down to 12,143, that drop was only 0.79%. On the other hand, the yield on 10-year Treasuries dropped to 2.81%, or a movement of 4.95%. Of course, with that drop in yield on 10-year Treasuries, the price went up (since yield and price on Treasuries work in reverse of each other.) Yes, it is amazing that even in this financial crisis, Treasury prices actually went up.
Regardless of what Congress and the White House do in the next few days about reaching an agreement on the debt ceiling, it is now expected that one or more of the debt “rating” agencies (Fitch, Moody’s, and S&P) will lower the ratings on government issued debt. Historically, U.S. Treasuries have carried an AAA rating, the strongest and best rating that can be given. Besides Treasuries, there are only four corporate issuers currently who have AAA ratings – Exxon Mobil, Microsoft, Johnson and Johnson, and Automatic Data Processing (ADP). Both Standard & Poor’s and Moody’s have suggested that they may lower the US Treasuries AAA rating if at least $4 trillion in savings are not realized in the next 10 years, even if a deal is reached prior to the August 2 deadline – a deadline that seems to be soft at this point.
If the rating agencies lower their ratings on US Treasuries, expected to go to AA, it would impact the requirements contained within the Ministers’ Retirement Plan’s Investment Policy Statement – a requirement that demands that the average credit quality of the portfolios not fall below our stated AA requirement. If US Treasuries are downgraded, our current average credit quality which is greater than AA status would most likely drop to an average of A – just as it would for every other pension fund in America.
Due to the mandate given to the Ministers’ Retirement Plan’s bond managers to maintain a top quality bond portfolio, we have been in constant contact with the bond managers over the past few weeks, and specifically over the past few days. The administration of the Ministers’ Retirement Plan has directed the bond managers to continue to manage our portfolios as they have been doing, regardless of any potential rating agency changes made to U.S. government debt. We have advised the managers that we understand that this may mean that the average credit quality of the portfolio may fall due to the “downgrade” of US Treasuries. In addition, we have advised the bond managers to consider making strategic purchases during this time of market fluctuation, since this politically imposed crisis may offer some great buying opportunities.
All the managers have expressed appreciation that we have taken proactive steps to provide them guidance during this crisis. While as a nation we are mesmerized by the colossal failure of our government to respond adequately during a time of financial crisis, the administration of the Ministers’ Retirement Plan wants you to be fully aware of the steps that we have taken to ride out this crisis and potentially to benefit from it.