As I write this at 9:49 am of the morning after Obama's reelection victory, all of the major stock market indices are down. The Dow Jones is down 2.18% and NASDAQ is down 2.40%. It's easy to score political points with those numbers. The market is clearly spooked by (1) the prospect that continued divided government will make resolving the impasse over the fiscal cliff harder and (2) the likelihood of continued heavy-handed regulatory and enforcement practices by the Obama administration.
But there's something more important going on under the rader screen. US Treasury securities historically have been used as a proxy in finance for the so-called "risk free rate"; i.e., the theoretical rate of return of an investment with no risk of financial loss. Hence, as Matthew Philips observed after S&P downgraded the US' credit rating:
U.S. T-bonds and bills have been a proxy for the risk-free rate for decades. Without a risk-free rate, modern finance essentially falls apart, since it is the building block of most financial models. People use it for determining everything from the value of a company, to the price of an option or a bond.
Of course, the very concept of a risk-free rate has always been relative. It assumes a zero chance of default. If you want to get technical, there isn’t a zero chance of anything really. But ... U.S. treasuries are still the least risky place to put your money in the whole world.
Not anymore, according to today's WSJ:
Treasurys have a new rival for safe-haven status: U.S. companies.
Bonds of Exxon Mobil XOM -3.42% and Johnson & Johnson JNJ -1.10% are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.
For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds. But some market observers said some fundamental changes in the financial health of U.S. companies relative to the government, including the fact that some corporations are more highly rated than Uncle Sam, suggest it could become a longer-lasting trend.
This is what four years Obamanomics has brought us: An historic reversal of the assumption that US treasury securities were so safe as to be essentially risk free. And the astonishing fact that the markets perceive some corporations to be less risky than the United States government.
One wonders what four more years will bring?
