It may or may not change in the short term, long term wise, people will consider US debt as being more risky and interest rate will increase, how much is the question.
China's largest debt rating agency downgraded us to AA last year. Egan Jones downgraded us to AA earlier this month. The rating doesn't matter. The size of the debt and our politics in solving the debt and deficit problems matter by far the most. S&P finally deciding to downgrade us won't make bond buyers change their buying habits. If we are AA, but with better finances than we have had at AAA then that trumps everything. The characters assigned to our debt rating from a nearly obsolete organization mean very little imo.
The rating does matter, and it matters a great deal. Our good rating is what enables us to borrow money at incredibly low interest rates. Yet despite that our interest on the debt is one of the biggest expenditures our govt. has to make. Increase that interest rate and it leads to way more govt. deficit, debt, and huge government expenditures without getting anything in return, because we are just paying interest.
It has an effect because it limits demand. There are enough institutions that can't invest in anything but AAA securities that would have to liquidate or at least not purchase them in the future. That would force interest rates up by reducing demand.
No, our amazingly powerful, transparent, and highly liquid economy are what allows us to borrow at these rates. Our AAA rating is derived from that. People own treasuries because they are safe due to the amount of wealth that exists in this country. They don't own them solely because there is a AAA rating attached to them. Combine that with Fed funds at almost 0% (due to deflation) and our reserve currency status and you get the rate environment we have today. Further, most of our debt we issue is relatively short term. I think it averages out to around 7 years in duration. These rates are not going to change unless we start to see some sort of sustained inflation or economic recovery. Maybe you will see some drop in the value of longer dated treasuries, but the primary source of our debt financing will not have a rate change due to a loss of our AAA rating.
Rating changes have a psychologically disproportionate amount of impact though, and seeing the United States falling from grace...is going to lead to yields going higher I think, if merely from the shock factor.
That isn't going to happen either. This is a non-event to the markets and this threat was priced in months ago when we were put on credit watch negative. If we come out of this downgrade with better finances and a focus on turning the deficit into a surplus to cut the debt then treasury prices will reflect that.
Unfortunately, the world has been overestimating how powerfult, transparent, and highly liquid our economy is. On the other hand, there aren't many other "AAA" (whatever the heck that means) options to put money these days.
I don't think the markets have fully priced it in, Greece's costs keep on spiraling up thanks to downgrade after downgrade, and the same for all of the struggling Eurozone economies, despite the fact that investors were fully aware of the fact that these economies were fundamentally off the rails quite a long time ago. Either way, most investors tend to react like sheep, and are nowhere close as rational and as calculating on aggregate as someone who would have priced this in months ago. When you have the President of the United States and other people warning a downgrade might be Armageddon, these kind of things tend to snowball, if only because of the "panic wave" tendencies of markets. (The opposite of Greenspan's "irrational exuberance"---perhaps "irrational pessimism?") I mean, it might not be as huge of a deal as the media make it out to be, but it certainly won't be a non-event.
Disagree on this as well. Our economic strength is not in question. Our government's ability to effectively solve problems and plan for the future are the issues that are in question.
If there is some sort of random sell off in treasuries then it will represent a buying opportunity imo.
I'm not saying smart and calculating people with a rational view on things can't make money off of this. I'm saying there's not enough of them for the market as a whole to realize that, and as such, I wouldn't term a downgrade a non-event. I would be short selling Treasuries right about now, because the amount of people that think like you do, is in my opinion, a lot less than the people who will race off the boats at the first sign of trouble.
Do you have a source for this? It would be interesting if true. Now, I'm no expert in this stuff, so I really couldn't say how much Treasury rates would be affected by the exit of these institutional investors. However, I think it's clear that a downgrade would be very bad for the economy. For one thing, Basel II & III regulatory capital requirements are based in part on credit rating. So any bank that holds Treasuries will have to reduce its loan exposure in the event of a downgrade. That would mean increased borrowing costs for everyone. Moreover, certain institutional investors (like money market funds and pensions) are required to hold AAA-rated securities. So you'd have a forced massive selloff of Treasuries by those instutitions, the impact of which would be unpredictable but probably destabilizing. As I said in an earlier post, this practice of basing regulations on ratings is really problematic. One definition of a financial crisis is a drop in asset values that occurs simultaneously with an increase in perceived risk. These kind of regulations make sure that the two go hand in hand, and that (because ratings are discrete and not continuous) the impact of both is sudden rather than gradual.
One of the most puzzling things about Frank-Dodd or any "attempt" at financial regulation is that rating agencies are never addressed on a true structural basis. It's akin to watching the boy who cried "wolf" get four tries. I mean, there's some nicely worded phrases in Frank-Dodd, but they're not being implemented properly, and even if they were, they would not be enough.
or long squeeze, aww yeah I dunno, you could lose money on the short term, since I don't think Rome can fall in a day or will fall, and any rational investor would consider that (look at Canada's downgrade for example in the 1990s, and now Canada is sparkling AAA-quality clean). But, I think on certain events, mass irrational movements take place, and you can cash on those. Downgrade=thought of US going down down down=panic. It's more of a 60/40 bet than a 99.9% thing, but hey, that's the market! And yes, that will impact American borrowing costs. Sadly. Which is partially why I refuse to bet on it, or the default of any nation. guess that's kinda stupid, but eh. The other reason I partially won't bet on it is I still can't time lapses of human judgment properly. Whoever can is going to be a guaranteed motherf**king billionaire. i mean, i've been betting against LNKD for some time. Came in at the right time (that brief 110 peak), but how that thing is still above 100...beats the hell out of me.
