The bond-rating companies have waded into the scrum over the debt limit. Moody's and Standard & Poor's jumped off the bench and onto the field and are throwing punches. They're not dispassionately reporting from the press box.
Please keep in mind, when you read and watch articles about the debt debate, that Moody's and S&P aren't impartial observers. They are participants. They have their own interests to pursue and their analysts have their political axes to grind. They aren't transparent about it.
Yesterday, Moody's announced that it will review the federal government's AAA bond rating for a possible downgrade. An S&P executive told lawmakers and lobbyists that the agency might skewer the nation's debt rating if it delays payments to vendors or Social Security recipients, even if it continues to make bond payments on time.
Moody's and S&P are saying what countless bloggers, columnists and TV shouting-heads have been saying: Get a deal done. But Moody's and S&P also are saying, "… or else" -- something that the bloggers and columnists and shouters can't do.
Don't forget that the ratings agencies gave stellar ratings to worthless mortgage-backed securities during the boom. Congress never seriously considered sanctioning or regulating the ratings agencies for their key role in the financial debacle. If they ever do, the agencies could reply, "Nice credit rating the country has. It would be a pity if something were to happen to it."
A spokesman for House Speaker John Boehner cited Moody's announcement soon after it was made, in a rhetorical volley against the White House. Moody's was a convenient source of ammo.
Meanwhile, according to The Wall Street Journal, an S&P managing director was meeting with Senate Democrats and officials from the U.S. Chamber of Commerce and the Financial Services Forum, two influential lobbying groups. He told them that a downgrade might follow any missed payments, not just missed debt payments.
It's interesting that this one-two punch from Moody's and S&P came on the same day, as if it were a coordinated effort for political impact.
The effect on mortgage bonds has been minimal and the impact on 10-year Treasury yields has been even less than that. I don't know how long mortgage bonds (and mortgage rates) can remain immune to debt debate. The closer we get to the Aug. 2 default deadline, the more likely we are to see an increase in mortgage rates.