Off the Charts: After a Rating Downgrade, U.S. Treasuries Turn a Profit

The rating downgrade, along with continued turmoil in European markets and fears that the United States might be entering a new recession, caused a flight to safety among investors. And, notwithstanding the agency’s opinion, money flooded into Treasuries and the demand for American dollars grew.

Since then, Treasury bonds have been one of the few investments that have produced good profits. As can be seen from the accompanying charts, an investor in long-term Treasuries would have earned a double-digit return, counting the small interest earned and the larger capital gains from rising prices. Shorter-term Treasuries have also rallied, although by smaller amounts.

When S. P. cut the United States’ rating from AAA to a still-high AA+, it went out of its way to praise France, which retains a AAA rating. Investors in long-term French bonds have not done badly over the period, with a gain of nearly 4 percent, measured in euros, since the S. P. move. Unfortunately, however, the weakness of the euro has more than offset that return.

Among the world’s major currencies, the dollar has been nearly the strongest since the downgrade. Only the Japanese yen has outpaced it, and that by a small amount. The Chinese renminbi, whose value is set by China and allowed to rise gradually against the dollar, is also up, but that would have been true no matter what happened in other markets.

If the Chinese currency did trade freely, it would no doubt be much higher than it is, but it too might have had a bad two months. Many currencies from emerging markets had been strong until recently, in part because foreign investors were buying them to invest in their stock markets. But it appears some investors are fleeing those markets as part of the flight to safety.

Both the Korean and Indian stock markets are down significantly in local currencies, and their currencies have depreciated against the dollar. In Brazil, the stock market came close to holding its own, so long as you look at local prices. But the real has lost about a tenth of its value, so the performance in international terms has been poor.

China’s stock market has been among the worst in the world, losing nearly a fifth of its value over those two months. The American market, by contrast, has been among the best after adjusting for currency movements.

It is a feature of the modern world that many countries, less concerned about the loss of buying power for their own citizens, welcome weak currencies, hoping that will help their exporters. As a result, the recent rise of the dollar has itself been a cause of worry in the United States.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

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