When developed economies start making it to the list of countries downgraded, it shows that the worse has really hit the fan. And yet, bondholders preferences continue to surprise and amaze analysts.
Moodys Investors Service downgraded Britain from its prized AAA rating, bringing it down to Aa1-the first downgrade for the country since 1970. Ironically, investors remained unaffected by the downgrade, with bond yields on 10-year Gilts--debt securities issued by the Bank of England-falling 3 basis points to 2.08 percent on Monday.
Moody claimed the downgrade came at the back of weak economic growth in the UK and rising debt burden, which reduces its shock absorption capacity. By the next year, Britains debt is expected to increase to 98 percent of GDP, up from an expected 95.4 percent in 2013, according to the European Commissions forecasts.
And yet, an article in Bloomberg says: "Bondholders and economists said rating cuts are a poor indicator of fiscal health. US and French yields are lower than they were when rating companies first downgraded the nations in the past two years."
However, notwithstanding the movement of bond yields, the British pound did wobble after the downgrade, falling to $1.5073 on Monday--the weakest level since July 2010.
Needless to say, for the British government this is sufficient cause for concern, especially, since George Osborne, Chancellor of the Exchequer, held the retention of Britains top rating as a test for his economic policy.
Still, Osborne stuck to his ground of eliminating Britains structural deficit, not weathered by the downgrade. Once again, the dilemma of growth versus austerity has been raised, but, it seems like Osborne will stick to austerity to drive the country out of structural deficits.
Danny Alexander, the Liberal Democrat Treasury chief secretary, defended the governments handling of the economy, claiming: "Of course, its (progress) is slower than expected, but I think we are making progress down the right road."
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