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U.S. Government Debt Markets

08/08/2011

In response to Standard and Poor's downgrade of the U.S. long-term credit rating, let's look at the potential consequences for the U.S. Government debt market: 

  • Contrary to S&P's rating action in the wake of the Budget Control Act of 2011, Moody's Investors Service and Fitch Ratings both reaffirmed their AAA credit rating for the U.S. (only New Zealand shares a similar scenario).
  • Post downgrade, the Federal Reserve issued the following statement:  "For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored enterprises will not change."
  • S&P's short-term U.S. credit rating remains unchanged at the highest A1+ rating, which suggests no impact on money market funds.
  • The potential for an additional long-term credit rating downgrade from the now AA+ to AA is still possible if the special congressional committee does not pass further deficit reduction measures by December 23, 2011.
  • The Federal Reserve said on Saturday, August 6, that emergency lending to banks and its ability to influence interest rates through open market operations  are unaffected by the downgrade.
  • I do not expect a downgrade from AAA to AA+ will force significant Treasury selling by money managers. Investment mandates will view this downgrade with a muted response and be altered to maintain the size of holdings.
  • Basel I and II categorize government debt from AAA to AA- as "zero-risk weight."
  • I expect the ultimate risk might be to the value of the U.S. dollar.

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