Half a decade ago, I wrote a post with a rather eye-catching lede. “This, we think, could well be the most important chart in the world right now,” it said.
It went on to discuss the disappearance of triple-A rated securities in the aftermath of the U.S. housing bubble and trillions of dollars worth of downgraded mortgage-backed securities. The disappearance was short-lived, however. By 2009, highly-rated government debt had more than filled the hole left by increasingly scarce AAA-rated securitizations.
“The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply,” said the 2011 post, written when worries over the eurozone debt crisis were in full swing. “It’s one reason why the sovereign crisis is well and truly painful.”
Frances Coppola has a much more recent post that reminded me of this.
It features a chart from the rating agency Standard & Poor’s, which forecasts that triple-A rated sovereign debt will essentially become an endangered species by 2050 thanks to a rise in government borrowing.
Coppola makes a good point here. “It’s a great chart. But what it is really telling us is that S&P’s way of assessing the creditworthiness of sovereigns belongs to a bygone age. In the new world, junk is safe, debt is an asset and investors fear governments. So ratings will be meaningless in future, and ratings agencies, redundant,” she concludes.
That said, I do wonder about the need and ability of the financial industry to re-engineer ‘safe’ securities with top-tier credit ratings, given the degree to which such ratings are still (incredibly!) embedded in our financial system – from liquidity buffers to central bank asset purchase programmes. For this reason, I would dearly love to see an updated chart encompassing all fixed income.
Update: A few days after this post, Gary Gorton and Tyler Muir published a related BIS paper on collateral shortages. Check out the write-up here.