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The UK government debt rating has been downgraded to AA-. This could cause the cost of government debt interest payments to increase in the future and make government borrowing harder to achieve. The link below is the source to the information.
All government debt should be at or near junk status if you ask me. Especially the US.
Sovereign debt is the most secure. And USA of course one of the best. No Treasury debt/interest has ever gone unpaid. One of the glories of monetary sovereignty. Never ever from a lack of funds, the worry of politics interfering with payment is still a reality.
It's not being paid back the nominal amount that you have to be concerned about, it's being paid back your purchasing power.
Future inflation is relevant to that debt paper as an investment. But nothing to do with the ratings of the sovereign debt. In general inflation works to make repayment of debt easier.
It's not being paid back the nominal amount that you have to be concerned about, it's being paid back your purchasing power.
In the United Kingdom a quarter of the government debt is index linked gilts, which means they increase payments in line with inflation. The risk of not getting the purchasing power of your money when the investment is repaid is taken away if you buy the index linked gilts. It is like an inflation insurance and a quarter of the UK's government debt is covered by this insurance. In the USA there is far less index linked gilt issuance so loss of purchasing power may be more of an issue there.
That's because you don't borrow purchasing power, you borrow dollars. The lender understands that and is willing to accept the debt interest rate.
In England you can buy Indexed Linked Gilts at the Treasury that protect against inflation by increasing the return in line with the Office for National Statistic's inflation figure.
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